RBI leaves benchmark rate unchanged despite oil price risks

Highlights

RBI kept the repo rate unchanged at 5.25%.
The neutral policy stance remains in place.
Inflation is forecast at 5% for fiscal 2027.
GDP growth is now projected to reach 6.7%.

The six-member Monetary Policy Committee unanimously held the repo rate at 5.25%, a decision widely expected by economists, Bloomberg reported. Indian government bonds gained after the announcement, while the rupee strengthened as markets interpreted the decision as cautious but supportive of growth.

RBI sees room to wait

The central bank lowered its inflation forecast for the year ending March 2027 to 5% from 5.1%, while warning that headline inflation could rise in the near term because of food and fuel costs. Officials said underlying price pressures remained moderate and had not yet spread broadly across the consumer basket.

That assessment gives India more room than several regional central banks that have tightened policy since the Middle East conflict pushed energy prices higher. The RBI views the increase in oil costs primarily as a supply shock and has indicated that monetary policy should respond only if it begins driving persistent, economy-wide inflation.

The approach carries risks because India imports roughly 90% of its crude oil. A prolonged disruption to regional supplies could raise transport and manufacturing costs, weaken the rupee, and eventually force companies to pass higher expenses to consumers.

Growth outlook improves

The RBI raised its growth forecast for the current fiscal year to 6.7% from 6.6%, reflecting resilient consumption, investment, and services activity. India expanded 7.8% in the January-March quarter, keeping it among the fastest-growing major economies.

Strong growth reduces pressure on policymakers to provide immediate monetary support. It also allows the RBI to focus on whether energy and food inflation become more persistent before considering either a rate increase or a renewed easing cycle.

Weather conditions remain another source of uncertainty. Weak rainfall in some agricultural regions and slower planting of crops such as rice and pulses could lift food prices, which carry the largest weight in India's consumer inflation index.

October decision will depend on incoming data

The next policy move will hinge on July inflation figures, second-quarter economic growth, and developments in global energy markets. The RBI has preserved flexibility by maintaining a neutral stance rather than signaling the direction of its next adjustment.

For markets, the decision points to a prolonged pause rather than an imminent change in borrowing costs. Stable rates can support credit and investment, but a lasting oil shock or broader inflation could quickly narrow the central bank's room to wait.

Earlier, we reported that the Bank of England keeps rates on hold amid volatile energy markets.

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