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The Reserve Bank of India’s Monetary Policy Committee (MPC) unanimously kept the policy repo rate unchanged at 5.25% and retained the neutral policy stance. The RBI cited heightened global uncertainty arising from the ongoing West Asia conflict, renewed trade tensions, volatile crude prices and uncertainty around inflation as key reasons for maintaining status quo. While inflation has moved above the 4% target, the central bank believes it is prudent to wait for greater clarity before taking any policy action.
Growth: Domestic Resilience Amidst Persistent Global Headwinds
Despite a challenging global environment, India’s economy continues to display resilience. Domestic demand remains healthy, manufacturing and services activity continue to expand, and exports have shown strong momentum. High-frequency indicators such as GST collections, vehicle sales, E-way bills and PMI readings point towards sustained economic activity. The supply-side pressures caused by the West Asia conflict have also eased to an extent.
In this backdrop, RBI has marginally revised its growth outlook upwards for FY2026-27 to 6.7% vs 6.6% earlier. Quarterly GDP growth is projected at 7.0% in Q1, 6.4% in Q2, 6.5% in Q3 and 6.8% in Q4. While government infrastructure spending, robust credit growth and resilient services are expected to support growth, risks from geopolitical tensions, weak monsoon, El Niño conditions and global trade uncertainty continue to weigh on the outlook.
Inflation: Supply Side Driven Pickup; No Signs of Generalization Yet
Headline CPI inflation increased to 4.4% in June 2026 as expected, ending a 16-month period of remaining below the RBI’s target. The increase was largely driven by food and fuel prices, while core inflation remained stable at 3.9% and core inflation excluding precious metals remained even lower at 2.3%–2.5%, indicating that broader price pressures remain contained. Also, the inflation for Q1 FY 2026-27 came in at 3.9%, which is 30 bps lower than RBI’s forecast of 4.2% earlier, indicating limited pass-through of cost pressures.
Going forward, RBI expects inflationary pressures to remain elevated due to volatile crude oil prices, weather-related risks- however, RBI noted that there are limited signs of generalization. CPI inflation for FY2026-27 has been marginally revised downward to 5.0% vs 5.1% earlier, with Q2 at 4.7%, Q3 at 5.9% and Q4 at 5.5%, while core inflation is expected to average 4.3% during the year.
External Sector: Capital Flows Improve, External Position Remains Comfortable
India’s external sector continues to remain resilient despite global uncertainty. The current account deficit remained at 0.6% of GDP during FY2025-26, while April-May 2026 recorded a current account surplus of US$2.8 billion, supported by strong services exports and remittances. During Q1 FY27, merchandise exports grew 15.9%, although imports rose faster at 19.9%, widening the trade deficit.
Foreign direct investment remained healthy, with gross FDI inflows of US$30.7 billion during April-June 2026. After witnessing outflows earlier in the year, foreign portfolio investments turned positive during June-July with net inflows of US$7.1 billion, supported by the capital flow measures announced in the June policy. Capital flow measures taken in the June policy resulted in an overall inflow of US$40.81 billion till July 31, 2026, with a large chunk from FCNR(B) deposits. India’s foreign exchange reserves remain comfortable at US$692.9 billion, providing import cover of over 10 months. RBI reiterated that while the exchange rate will remain market-determined, it stands ready to curb excessive volatility whenever necessary.
System liquidity remained in surplus at an average of around ₹1.0 lakh crore since the June policy. Short-term money market rates moderated during July, while government bond yields eased following the measures introduced to attract foreign investment into Indian debt markets. Credit growth remains healthy, with bank credit growing 17.7% year-on-year and overall credit from all sources expanding 16.3%. RBI reiterated that it would continue to be proactive in liquidity management to ensure orderly market functioning and smooth transmission of monetary policy.
Outlook: RBI in a Wait-And-Watch Mode as Growth-Inflation Dynamics Remain Under Control
RBI delivered a neutral hold in the August policy with a 10-bps downward revision to inflation forecast and a 10-bps upward revision to GDP growth relative to the June policy. The overall tone was balanced, and the neutral stance indicates that the RBI is not in a hurry to take any rate action in the coming quarters. While RBI noted that domestic growth remains resilient and inflation sees limited generalisation, it highlighted three key risks to India’s macro-economic outlook- 1) resurgence in geopolitical tensions, 2) El-Nino impact and Monsoon uncertainties, and 3) renewed global tariffs and trade restrictions.
We believe the RBI is likely to remain on hold in FY27 unless energy prices remain elevated and inflation pressures become broad-based. We expect the 10-year G-Sec yield to trade in the 6.70%–6.90% range, while high-quality corporate bonds in the 3–5-year segment continue to offer attractive risk-adjusted return opportunities. The trajectory of crude oil prices, monsoon progress, global trade developments, capital flows and exchange rate movements will remain key variables to watch over the coming quarters.
Annexure:
Repo Rate – The interest rate at which the RBI lends money to commercial banks.
CRR – The share of a bank’s total deposits that must be kept with the RBI in cash.
Stance – It gives an indication to the future policy action.
SDF – The rate at which Banks lend to RBI without collateral.
MSF –The rate at which RBI lends (provides emergency liquidity) to Banks.
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