The Reserve Bank of India’s Monetary Policy Committee (MPC), chaired by Governor Sanjay Malhotra, unanimously voted to keep the policy repo rate unchanged at 5.50% at the conclusion of its 56th meeting held from August 4 to 6. This marks a pause following 100 basis points of cumulative rate cuts earlier in the year. 

The committee also decided to maintain the neutral stance, keeping the standing deposit facility (SDF) at 5.25% and the marginal standing facility (MSF) and Bank Rate at 5.75%.

The decision aligns with the central bank’s objective of anchoring consumer price index (CPI) inflation at 4% within a ±2% band, while continuing to support economic growth.

Inflation Outlook Eases Sharply

Headline inflation declined for the eighth consecutive month in June 2025, falling to 2.1% year-on-year, the lowest in 77 months. This drop was primarily driven by deflation in food prices, aided by improved agricultural activity and supply-side measures. Food inflation turned negative for the first time since February 2019.

In light of these developments, the RBI revised its CPI inflation forecast for FY26 down to 3.1%, from 3.7% projected earlier. Quarterly projections now stand at 2.1% for Q2, 3.1% for Q3, and 4.4% for Q4 of FY26. CPI inflation for Q1 of FY27 is projected at 4.9%.

Despite the current softness, the MPC noted that inflation is expected to edge above 4% from Q4 onwards due to base effects and demand-side pressures. Core inflation, excluding precious metals, averaged 3.4% in Q1 and is expected to remain moderately above 4% for the rest of the year.

Growth Outlook Steady at 6.5%

The MPC retained its real GDP growth forecast for FY26 at 6.5%, with quarterly projections of 6.5% in Q1, 6.7% in Q2, 6.6% in Q3, and 6.3% in Q4. Growth for Q1 of FY27 is projected at 6.6%.

The committee observed that domestic economic activity remains resilient, supported by private consumption, rural demand, and strong government capital expenditure. A normal monsoon, rising capacity utilisation, and favourable financial conditions are also expected to sustain momentum. However, industrial growth remains uneven, and external demand faces headwinds from ongoing tariff actions and global trade negotiations.

Rationale for the Pause

While the recent decline in inflation has outpaced earlier projections, the MPC emphasized that much of this moderation is driven by volatile food prices. With core inflation trending around 4% and expected to inch up, and with the full impact of earlier rate cuts still unfolding, the committee opted to maintain status quo.

Impact of U.S Tariffs and Inflation Drivers

RBI Governor Sanjay Malhotra stated that the central bank does not anticipate a major impact from recent U.S. tariff actions unless retaliatory measures are introduced. On inflation, he noted that India’s exposure to global inflation shocks is limited, with a large share of the CPI basket comprising food and non-tradable items.

The Governor also said that any shift in oil sourcing away from Russia is unlikely to materially affect domestic inflation, citing pricing buffers and fiscal flexibility.

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