RBI's MPC Holds Policy Rate at 5.25% Amid Geopolitical Risks, Banks Focus on 'Wait and Watch' Approach

RBI's MPC Holds Policy Rate at 5.25% Amid Geopolitical Risks, Banks Focus on 'Wait and Watch' Approach​

Monetary Policy Stance Remains Neutral as RBI Reviews Global and Domestic Shocks​

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), in its sixty-first meeting held from June 3 to 5, 2026, voted unanimously to maintain the policy repo rate unchanged at 5.25 per cent. This decision was taken amidst evolving global and domestic developments, particularly the prolonged West Asia conflict and associated supply chain disruptions.

The standing deposit facility (SDF) rate remains steady at 5.00 per cent. Consequently, the marginal standing facility (MSF) rate and the Bank Rate have been set at 5.50 per cent. The MPC decided to continue with a neutral policy stance, reflecting a cautious approach given the high degree of uncertainty surrounding future risks.

Economic Outlook: Growth Projected at 6.6% for FY27​

The RBI projected real GDP growth for 2026-27 at 6.6 per cent, down from the 7.6 per cent estimate in 2025-26. The MPC forecasts are detailed quarterly: Q1 at 6.6 per cent, Q2 at 6.3 per cent, Q3 at 6.5 per cent, and Q4 at 6.8 per cent.

Despite the risks, the MPC noted that domestic economic activity remained largely steady since the conflict breakout. Private consumption has proven resilient, while fixed investment maintained momentum despite cost pressures. Services exports were also robust, countering headwinds faced by merchandise exports due to elevated freight and insurance costs and weak global demand.

Inflation Projections and Cost Pressures Analysis​

Headline CPI inflation was projected at 5.1 per cent for 2026-27, which is an increase from the very benign rate of 2.1 per cent in 2025-26. The committee projects Q3 at 5.9 per cent and Q4 at 5.4 per cent. Core inflation is forecasted at 4.7 per cent for 2026-27, orably suggesting that demand pressures remain controlled.

Inflation in the near term was influenced by heightened food prices and fuel costs. Fuel inflation has seen a cumulative increase of 7.4 per cent for petrol and 8.4 per cent for diesel since May. Analysts stressed that while input cost rises (such as those seen in WPI) are visible in raw materials, their pass-through to consumer prices must be monitored closely in the coming months.

Global Headwinds and Domestic Resilience​

The global outlook remains challenging due to the prolonged West Asia conflict, which has increased risks to both inflation and growth. Energy markets remain volatile, crude oil reserves are declining, and global commodity prices have firmed up. This environment is causing major advanced economy central banks to consider monetary policy tightening.

Domestically, the economy exhibits resilience. The RBI noted that before the conflict started at the end of February, the Indian economy enjoyed a 'goldilocks moment' characterized by robust growth and benign inflation. Furthermore, efforts by the government, including support to MSMEs and diversification of critical imports, have strengthened economic resilience against external shocks.

Expert Viewpoints on Policy Neutrality​

Committee members provided detailed rationale for maintaining the status quo, emphasizing that risk management is the most sensible approach given the "two-way risks" on the inflation-growth outlook.

Dr. Nagesh Kumar noted the challenging situation created by the conflict and the blockade of the Strait of Hormuz, which has impacted India’s economy due to its dependence on hydrocarbon imports. Despite these concerns, he highlighted that India entered this crisis with stronger macroeconomic fundamentals than in previous economic downturns.

Shri Saugata Bhattacharya emphasized that the balance of risks has tilted towards embedding inflationary pressures due to persistent commodity supply shocks and official meteorological forecasts signaling deficient rains. He maintained that the existing tight domestic financial conditions obviate the need for additional policy tightening at this time.

Prof. Ram Singh pointed out that while urban demand remains robust, there are signs of moderation in some sectors, with IIP showing a growth rate of 4.9 per cent in April 2026, down from 5.7% in the previous year. He stressed the need to carefully support growth without risking an unanchoring of inflation expectations.

Path Forward: Data Dependency and Vigilance​

The MPC concluded that prudence requires "waiting for greater clarity" to emerge regarding the impact of geopolitical instability and adverse weather outcomes. The committee will remain data-dependent, closely monitoring how supply-side pressures embed into the general price level and inflation expectations.

Shri Sanjay Malhotra summarized the consensus, noting that while CPI is projected above target, he preferred to wait due to high uncertainty surrounding conflict duration and monsoon intensity. He maintained that core inflation remained contained, suggesting underlying inflationary pressures are currently subdued. All members voted in favor of keeping the repo rate at 5.25 per cent and retaining a neutral stance, signaling that future policy action will be highly contingent on evolving data.