RBI Keeps Repo Rate Unchanged at 5.25% Despite Global Crisis

The Reserve Bank of India on Friday said it has decided to keep the repo rate unchanged at 5.25 percent. 

The unanimous decision comes after the six-member Monetary Policy Committee (MPC) met on June 3, June 4 and June 5 to deliberate the policy repo rate. Following the decision, the standing deposit facility (SDF) rate remains at 5.00 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 5.50 per cent. The MPC also decided to continue with the neutral stance.

The RBI also revised the projection for GDP growth for 2026-27 at 6.6 per cent, with Q1 at 6.6 per cent; Q2 at 6.3 per cent; Q3 at 6.5 per cent; and Q4 at 6.8 per cent. Though it cautioned that prolonged global supply chain disruptions, heightened volatility in global financial markets, and weather-related shocks continue to pose downside risks to the domestic growth outlook.

The much-anticipated announcement comes in the wake of the Iran-US war that has crumbled the supply chain for energy, rupee under immense pressure against the dollar, and increasing inflation. 

RBI Governor Sanjay Malhotra said in a statement: “Excluding precious metals, core inflation was much lower at 2.1-2.2 per cent during the same period. International crude oil prices (Indian basket) have averaged around US$110/barrel during April-May 2026 and indications are that average oil prices for 2026-27 would be substantially higher than what were assumed during the last policy statement. Higher energy prices and an increase in several input prices also led to a sharp spike in WPI inflation in April 2026.”

Malhotra also noted the recent pass-through of high global crude oil prices to domestic pump prices of petrol and diesel. He also noted that the commercial LPG, industrial raw materials, chemicals, base metals, rubber, and plastic products, among others, have increased.

“Considering all these factors, CPI inflation for 2026-27 is projected to be at 5.1 per cent with Q1 at 4.2 per cent; Q2 at 5.1 per cent; Q3 at 5.9 per cent; and Q4 at 5.4 per cent. Core inflation is projected at 4.7 per cent for 2026-27,” he said.

The RBI chief also cautioned that these forecasts are subject to upside risks due to global supply chain disruptions, global commodity price shocks, uncertainty about the spatial and temporal distribution of the south-west monsoon and El Niño conditions. 

“Adequate stock of foodgrains and satisfactory reservoir levels, however, provide some comfort,” he said.

Global crisis & India

As mentioned above, the prolonged conflict in the Middle East has had an adverse impact on several economies. India has been no exception. The biggest pain point has been the dependence on import for crude oil. In May we finally saw the increasing prices finally passing on to retail consumers. Even as Prime Minister Modi made an appeal to reduce oil consumption, there have been some initiatives to tackle the situation. 

The supply chain rupture has implications beyond energy. For instance, the conflict has led to a rise in the cost of imported fertilizers and other input materials, affecting sectors as sensitive as agriculture.

Also, the rupee has been under pressure against the US dollar. On Thursday, it fell by 7 paise to INR 95.83 against the USD. Some experts have said that the rupee might go past the 100 threshold. 

For food security, there are concerns that weaker monsoon could affect the demands in rural areas vis-a-vis urban areas. 

“The south-west monsoon is expected to be deficient, with implications for agricultural activity and rural demand. However, the programmes and initiatives for crop diversification, water harvesting and conservation, climate-resilient practices and short-duration crops, among others, are expected to mitigate the impact,” the RBI noted.

New Reality & Imminent Hikes

Even as experts say that the decision to keep rates unchanged and maintain a neutral stance was largely expected, they warn that it is unlikely that domestic borrowing costs for Indian corporates will revert to pre-Gulf crisis levels. And some experts also caution that the central bank may consider increasing the rates at some point.

Debopam Chaudhuri, Chief Economist, Piramal Group, notes that debt markets are expected to gradually incorporate this reality, resulting in a sequential increase in funding costs. 

“In our view, the first policy rate hike could materialize by February 2027, marking the beginning of a formal rate-tightening cycle and eventually leading to higher borrowing costs even for EBLR-linked retail loans,” Chaudhuri said. 

“At the same time, the decision to expand foreign investor participation in longer-tenor government securities through the FAR route is a constructive measure. It not only has the potential to support foreign capital inflows and provide stability to the rupee, but also helps mitigate any crowding-out effects within private corporate borrowers arising from higher government borrowing requirements owing to the prevailing crisis,” he added.

In case you missed, the central bank this morning announced expanding the government securities eligibility under the Fully Accessible Route (FAR). The decision now opens up certain sections of 15-year, 30-year and 40-year tenor government securities (G-Secs) under the FAR. 

“Recognising the importance of a competitive tax regime in attracting global capital, the Government has decided to rationalise the tax treatment applicable to investments by FPIs in Government Securities, by exempting such investments from income tax on any interest or capital gain.  This step will align the taxation on G-Secs with many comparable jurisdictions,” the Finance Ministry said in a statement.

Noting the central bank’s “wait-and-watch” approach, Sumit Singhania, Head of Research- Bajaj Broking said in a statement that domestic demand, private consumption, and services exports have exhibited strong resilience but intensifying global conflicts, supply disruptions, and elevated energy prices are beginning to weigh on economic activity. 

“Although current CPI inflation remains below target, baseline projections indicate it could firm up to the upper range of the tolerance band by Q3FY27 due to an uncertain food price outlook and potential second-round generalization effects. The impact of these supply shocks is expected to noticeably weigh on the economy from Q4 onwards as higher energy costs pass through to retail products. In a highly positive move for the capital markets, the government has exempted Foreign Institutional Investors (FIIs) from capital gains tax on any interest earned from government securities. This fiscal cushion arrives at a crucial time, offering a strong shield to domestic markets as the RBI chief warned of volatile forex markets driven by shifting global sentiments,” Singhania explained.

Vikram Chhabra, Senior Economist, 360 ONE Asset adds: “…A rate-led defence of the currency would have been an imprecise instrument at this juncture, and it made sense to look through any temporary spike in inflation while awaiting clarity on the monsoon outlook and the West Asia conflict. Instead, the RBI addressed the root issue, announcing measures to improve capital flows. We expect pressure on the rupee to ease from here. However, the growth-inflation trade-off is becoming more acute, and the RBI may need to weigh rate hikes in upcoming meetings.”