The Reserve Bank of India (RBI) on June 5 kept its policy rate at 5.25%, striking a balance between the inflationary risks and a less robust growth estimate. A status quo for rates was anticipated and nearly 80% of 56 economists polled by Reuters believed it would happen.
The Monetary Policy Committee unanimously decided to maintain its “neutral” stance with the policy rate unchanged. Meanwhile, the global economic outlook is “overcast” by the Middle East “geopolitical impasse,” and this has made monetary policy “more cautious”, RBI Governor Sanjay Malhotra said.
The RBI has raised its inflation estimate for the current fiscal year, which ends in March 2027, by 50 basis points to 5.1%, from the previous estimate of 4.6%. Core inflation is now estimated to be 4.7%, compared to 4.4% previously.
According to the RBI Governor, underlying price pressure remains benign, but second-round effects require close monitoring. Inflation increased for the sixth consecutive month in April, reaching 3.48% after climbing to 3.40% in March, even before higher fuel prices were fully passed on.
Inflation for food items also went up to 4.2% in April, from 3.87% in March. Analysts are concerned that a late monsoon and high likelihood of El Niño may drive food prices up.
The central bank cut its GDP growth estimate for the current financial year to 6.6% from the previous 6.9%. The revision has been driven by rising oil prices, international supply chain disruptions, foreign fund outflows, and uncertainty about the Middle East conflict. In the year ended March 31, 2026, India's economy is expected to have grown 7.6%. Data is due later on Friday. The growth for the first quarter is projected at 7.2%, down from 7.8% in the previous quarter.
The RBI has also taken measures to bring in foreign inflows and support the rupee, which has fallen 6.02% year-to-date against the US dollar, according to LSEG data.
These measures comprise forex swaps with concessional rates until September 30, 2026, for public sector undertakings to finance their dollar loans and incentives for banks to draw 3-year and 5-year FCNR deposits.
The government also removed capital gains tax for foreign investors in government bonds and eliminated 20% tax on interest on government bonds with effect from April 1, 2026. Taken together, the measures could draw in $40-$60 billion, said Sachchidanand Shukla, group chief economist at Larsen & Toubro.
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The rupee jumped 0.35% to Rs. 95.48 against the dollar and the 10-year bond yield came down to about 6.96% following the RBI decision. The Nifty 50 index rose by around 0.2% following the policy announcement.