The Reserve Bank of India (RBI) kept its benchmark interest rate unchanged on Wednesday, 5 August, and retained a neutral policy stance as it waited for clearer evidence on whether higher food and energy costs were spreading across the wider economy.

The six-member Monetary Policy Committee (MPC) voted unanimously to hold the repo rate at 5.25%, extending the pause for a fourth consecutive policy review. The standing deposit facility rate remained at 5%, while the marginal standing facility rate and bank rate stayed at 5.5%.

The decision was widely expected, but the accompanying forecasts suggested the RBI had become slightly more confident about India’s growth and inflation outlook. It raised its estimate for economic growth in the year ending March 2027 to 6.7% from 6.6% and lowered its average consumer inflation forecast to 5% from 5.1%.

The combination of stronger projected growth and lower inflation reduced the immediate case for either raising or cutting rates. Governor Sanjay Malhotra said the RBI needed greater clarity about inflation’s trajectory and composition before changing policy.

The central bank is attempting to distinguish between temporary price increases caused by disruptions to oil, food and supply chains and a more persistent inflation cycle in which higher costs spread to wages, services and other goods.

Headline inflation has moved above the RBI’s 4% target, largely because of food and fuel costs, but underlying inflation remains relatively contained. The RBI said broader price pressures had not yet become sufficiently widespread to require tighter policy.

At the post-policy press conference, Malhotra said the RBI was “neither dovish nor hawkish” and regarded the current repo rate as appropriate.

“We are neither dovish nor hawkish. We feel this is the right policy rate,” he said.

Malhotra also stressed that the RBI’s formal objective was headline inflation rather than core inflation. However, he said the central bank did not want temporary volatility caused by food and fuel prices to be repeatedly transmitted into changes in the policy rate.

The remarks strengthened the signal that the RBI was in no hurry to move in either direction. A rate increase would probably require evidence that food and energy costs were spreading more broadly through prices, wages and inflation expectations, while a cut would require a more durable easing in headline inflation or a material weakening in growth.

Inflation expected to peak in third quarter

India’s retail inflation rose to 4.38% in June from 3.93% in May, moving above the RBI’s 4% medium-term target for the first time in 17 months. Food inflation increased to 5.32%, according to the Ministry of Statistics and Programme Implementation (Mospi).

The RBI expects inflation to rise further before reaching a peak during the October-to-December quarter and then easing.

Consumer inflation is projected at 4.1% in the first quarter of the fiscal year, 4.7% in the second, 5.9% in the third and 5.5% in the fourth. Compared with its June projections, the central bank lowered its estimates for the first two quarters, kept the third-quarter forecast unchanged and marginally increased the fourth-quarter estimate.

The central bank also cut its estimate for core inflation, which excludes food and fuel, to 4.3% from 4.7%. Core inflation provides a measure of whether price pressures are becoming embedded across the economy rather than remaining concentrated in volatile commodities.

The revised forecasts keep inflation within the RBI’s statutory tolerance range of 2% to 6% throughout the fiscal year. That gives the central bank room to look through temporary supply shocks instead of raising rates immediately and weakening economic activity.

The RBI nevertheless warned that higher food, fuel, freight and production costs could eventually produce second-round effects. Businesses facing sustained increases in transport, energy and raw-material costs may pass those expenses on to consumers, broadening inflation beyond the items directly affected by the initial shock.

Much will depend on crude oil prices and the duration of the conflict in West Asia. India imports most of the oil it consumes, leaving inflation, the trade balance, government finances and the rupee exposed to prolonged increases in global energy prices.

Oil prices have retreated from their recent highs, allowing the RBI to lower its annual inflation forecast. However, renewed conflict since early July has increased volatility, making the direction of energy prices difficult to predict.

Monsoon poses food-price risk

The other major uncertainty is India’s southwest monsoon. Rainfall has been deficient and uneven in parts of the country, while El Niño conditions could affect the distribution and timing of rainfall. A weak or poorly distributed monsoon can reduce agricultural output, raise food prices and weaken rural incomes and consumption.

The RBI said adequate foodgrain stocks, government supply measures, crop diversification, water conservation and the increased use of short-duration and climate-resilient crops could partly contain the impact. Reservoir levels also remained close to normal.

Food accounts for a substantial share of India’s consumer inflation basket, limiting the RBI’s ability to ignore agricultural price shocks if they persist. Interest-rate increases cannot produce more vegetables, cereals or rainfall, but prolonged food inflation can affect expectations and lead workers and businesses to seek higher wages and prices.

The neutral stance allows the RBI to move in either direction depending on the evidence. It does not signal that the next move will necessarily be a rate cut or an increase.

Growth forecast raised

The RBI raised its growth forecast after economic activity during the April-to-June quarter appeared stronger than it had expected.

It now projects real gross domestic product (GDP) to expand 7% in the first quarter, compared with an earlier estimate of 6.6%. The second-quarter forecast was increased to 6.4% from 6.3%, while projections for the third and fourth quarters were maintained at 6.5% and 6.8%, respectively.

Private consumption remained resilient, supported by discretionary spending and relatively stable employment conditions. Investment indicators linked to construction, capital goods and bank lending also remained firm, while services exports continued to support external demand.

Bank credit was growing at close to 18%, according to Reuters, although parts of the manufacturing economy have weakened and purchasing managers’ data have pointed to slower expansion.

The RBI said government infrastructure spending, high industrial capacity utilization and the availability of credit should continue to support investment. Recent changes to goods and services tax rates were also expected to sustain consumption.

Agriculture and rural demand present a less certain picture. Poor rainfall could affect crop output and rural purchasing power, while elevated energy costs and disruption to global trade routes could raise business expenses.

The RBI said India remained the world’s fastest-growing major economy, supported by domestic demand, manufacturing, services and exports. It warned, however, that global economic conditions could still weigh on activity through weaker trade, volatile commodity prices and tighter financial conditions.

No immediate change for borrowers

The pause means borrowers should see little immediate change in interest rates on floating-rate home, vehicle and other retail loans linked to the repo rate.  Borrowing costs may still change because of a lender’s funding costs, credit-risk assessment or adjustments to the spread charged over the external benchmark.

The repo rate has remained at 5.25% since December 2025, following cumulative reductions of 100 basis points between April and December last year.

Deposit rates are likely to remain broadly stable in the immediate term, although individual banks can alter fixed-deposit rates depending on their funding requirements.

A prolonged pause would provide greater certainty to borrowers and businesses, but it would also end expectations of immediate relief through another rate cut. The RBI’s message was that the hurdle for both easing and tightening remained relatively high.

Rupee and external position

The RBI said India’s balance of payments was on course to record a healthy surplus during the fiscal year, supported by services exports, remittances and capital inflows.

Measures announced in June to attract foreign currency deposits and overseas borrowings had generated more than $41 billion in inflows. Foreign direct investment totaled $13.5 billion during the April-to-June quarter.

Those inflows, together with lower oil prices and RBI intervention in the foreign-exchange market, have helped stabilize the rupee. The currency has recovered about 1% since June but remains about 5.4% weaker against the dollar this year.

Malhotra said the exchange rate would continue to be determined by market forces, while the RBI acted to limit excessive volatility, speculative activity and disorderly movements.

The remarks indicated that the central bank would continue to use foreign-exchange intervention and liquidity measures rather than interest rates alone to manage pressure on the currency.

Liquidity remains supportive

Average liquidity in the banking system has remained in surplus by more than ₹1 trillion since June, the RBI said.

The central bank promised to maintain sufficient liquidity to meet the economy’s requirements and ensure that earlier interest-rate decisions were transmitted through lending and money-market rates.

Liquidity is expected to remain supported by government spending, the return of currency to the banking system after the seasonal monsoon-related increase in cash demand and the foreign inflows generated by the RBI’s June measures.

The combination of an unchanged policy rate and surplus liquidity represents a relatively supportive financial environment even though the RBI has stopped cutting rates.

Regulatory changes proposed

Alongside the interest-rate decision, the RBI proposed changes intended to make loan pricing more consistent and transparent.

It plans to harmonize rules governing interest rates on advances across banks and other regulated financial institutions. The proposals would address operational differences in the marginal cost of funds-based lending rate and external benchmark-linked lending rate systems.

The central bank also wants to standardize practices governing how lenders count interest-accrual days and determine benchmark reset dates. Draft rules will be issued for public comment.

The changes could make it easier for borrowers to compare loans and understand when changes in benchmark rates will affect their repayments. They could also strengthen the transmission of future RBI rate decisions.

The RBI separately announced that it would issue draft guidelines to resume on-tap licensing of urban cooperative banks, reopening a route for new entrants subject to regulatory and capital requirements.

Financial markets reacted modestly because the rate decision had been largely priced in. The Sensex closed 152 points higher at 78,581, while the Nifty 50 gained 10 points to 24,624.65. The benchmark 10-year government bond yield traded around 6.78%, and the rupee was near ₹95.09 against the dollar after the policy announcement.

The forecasts were marginally more favorable than expected, with higher growth and lower inflation, but the RBI avoided committing itself to a future rate path.

Economists remain divided over what comes next. Some expect the RBI to hold rates for the rest of the fiscal year if inflation remains contained. Others see a possibility of increases later in the year if oil prices stay high, the monsoon weakens and inflation spreads beyond food and fuel.