RBI Keeps Repo Rate Unchanged At 5.25%, Lowers FY27 Inflation Forecast To 5%

NEW DELHI, Aug 5: The Reserve Bank of India’s Monetary Policy Committee (MPC) on Wednesday kept the benchmark repo rate unchanged at 5.25 per cent and retained its ‘neutral’ policy stance, citing the need for greater clarity on the inflation trajectory amid risks from the southwest monsoon, El Nino, geopolitical developments and global trade policy.

The central bank also retained the Standing Deposit Facility (SDF) rate at 5.0 per cent and kept the Marginal Standing Facility (MSF) rate and bank rate unchanged at 5.5 per cent following the conclusion of its three-day policy meeting, RBI Governor Sanjay Malhotra said.

The RBI lowered its Consumer Price Index (CPI) inflation forecast for the current financial year by 10 basis points to 5.0 per cent. Quarterly inflation projections have been pegged at 5.3 per cent in Q1, 4.7 per cent in Q2, 5.9 per cent in Q3 and 5.5 per cent in Q4. Core inflation for FY27 has been projected at 4.3 per cent.

Malhotra said headline inflation is expected to rise mainly due to supply-side pressures from food and fuel, while core inflation remains moderate and is expected to decline after peaking in the third quarter. He said greater clarity on the inflation trajectory and its composition would be needed before any further policy action.

“Core inflation, excluding precious metals, is projected to be lower than core, although it is likely to align with core inflation towards the end of the financial year,” the Governor said.

He said the rise in inflation in June was primarily driven by higher food and fuel prices, including fuel-induced inflation. Despite elevated input costs, core inflation, excluding food and fuel, remained unchanged at 3.9 per cent in May and June.

The RBI flagged the impact of El Nino on the temporal and spatial distribution of rainfall as a key risk, while sharp two-way movements in global oil prices due to geopolitical developments have clouded the near-term inflation outlook. Malhotra cautioned that second-round effects from higher food, fuel and other input costs could spill over into broader inflation.

On liquidity, the Governor said the seasonal return of currency during the monsoon, drawdown of government cash balances and special measures to attract capital inflows were expected to support banking system liquidity in the near term. Short-term money market rates, particularly commercial paper and certificates of deposit rates, moderated in July, he added.

On agriculture, Malhotra said the outlook remained clouded by deficient and uneven southwest monsoon rainfall under El Nino conditions. However, reservoir levels were close to normal, while crop diversification, promotion of short-duration and climate-resilient crops, and water harvesting and conservation measures were expected to mitigate the impact of deficient rainfall.

He said manufacturing could face cost pressures, but increasing diversification of global supply chains should help cushion the impact.

The Governor further said supply-side pressures arising from the West Asia conflict had eased somewhat since June, but renewed escalation since the first week of July had increased energy price volatility and revived uncertainty over global supply chains. (Agencies)