The RBI kept the repo rate unchanged at 5.25% and maintained a neutral policy stance, signaling no immediate rate changes. The announcement coincided with a temporary easing of global tensions after a two-week US-Iran ceasefire, which led to a drop in crude prices and provided a short-term boost to Indian equities and the rupee.

RBI Rate Snapshot: Pre- and Post-MPC Decisions

Note: The RBI has cumulatively cut the repo rate by 125 basis points since February 2025. The transmission of these cuts into credit markets continues and was cited as a reason for maintaining the current pause.

Economic Growth Outlook

FY2025-26: India’s economy stayed strong, growing an estimated 7.6%, driven by healthy consumption, investment, and supportive policies.

FY2026-27: Growth is expected to moderate to 6.9%, as higher energy prices and supply chain disruptions from the Strait of Hormuz weigh on the economy.

Growth Drivers: Services sector momentum, GST rationalisation benefits, strong corporate and bank balance sheets, healthy private consumption, and continued appeal for greenfield FDI projects support India’s growth.

Risks: Rising energy and commodity prices from the West Asia conflict, supply chain disruptions via the Strait of Hormuz, and potential pressures on the fiscal deficit pose downside risks.

Inflation Outlook

FY2026-27 CPI Projections

FY2026-27 Inflation Outlook: The RBI expects CPI inflation at 4.6%, comfortably within the 4% ±2% target range. For the first time, Governor Malhotra shared core inflation projections, estimated at 4.4%, signaling a move toward greater transparency on underlying price trends.

The Q3 inflation spike to 5.2% is likely driven by seasonal food price pressures and the lagged pass-through of elevated energy costs. The Governor acknowledged that upside risks to inflation have increased, though India's economic fundamentals remain on a strong footing.

Forward Outlook

The MPC’s decision to keep rates unchanged reflects a careful balance between supporting growth and containing inflation. With 125 bps of rate cuts already delivered since February 2025, the Committee is waiting to see how the economy responds before further action.

Geopolitics in West Asia remains the biggest near-term risk. A sustained ceasefire and reopening of the Strait of Hormuz could ease pressure on crude prices, the current account, and the rupee, while any escalation would likely push the RBI toward a more hawkish stance.

Key market watchpoints: crude oil trajectory, Q3 FY27 inflation, credit growth and rate transmission, and global central bank actions, with US Fed cuts largely off the table for 2026.

Best Regards
 

Alpha Research

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