RBI keeps repo at 5.25%, flags 4% inflation target

What the RBI said after the policy decision

The Reserve Bank of India reiterated that its medium-term inflation goal of 4% remains the anchor for monetary policy, even if near-term readings move away from that level. RBI Governor Sanjay Malhotra said the target is “sacrosanct” and “not in abeyance”, pushing back against questions on whether the central bank is shifting attention to the wider 2-6% tolerance band.

The comments came after the Monetary Policy Committee (MPC) decided to keep the policy repo rate unchanged at 5.25%. Malhotra also stressed that inflation targeting is designed to be achieved over time, and that reacting to each deviation can create costs that outweigh benefits.

Why the RBI will not respond to every deviation

Malhotra said the RBI does not take action for “each and every” deviation from the 4% target, especially small deviations. He argued that frequent and aggressive responses to short-term shocks can have “disproportionate” consequences for growth.

The governor’s framing puts emphasis on the medium-term nature of the target. In practice, it suggests the RBI will weigh the source of inflation changes and avoid responding mechanically to every month’s data, particularly when temporary factors are driving price moves.

Inflation outlook turned “more adverse” than earlier

Alongside the policy decision, Malhotra acknowledged that inflation conditions have become “more adverse than it was previously”. He said any future monetary policy action would depend on whether price increases become broad-based and persistent.

In the same interaction, Malhotra noted the RBI has raised its consumer inflation estimate for FY27 by 0.5 percentage points to 5.1%. Asked whether this should be read as a signal of an imminent rate hike at the next review, he said he could not say if it “strengthens the case or not”, but agreed the outlook is more adverse than before.

The rate decision and the corridor around it

The MPC voted unanimously to keep the policy repo rate unchanged at 5.25%. With that, the Standing Deposit Facility (SDF) rate remained at 5%, and the Marginal Standing Facility (MSF) rate and the bank rate at 5.5%.

These rates define the operating corridor around the policy rate and influence money-market conditions. They also provide a reference for how policy intent transmits into short-term funding costs.

How the tolerance band fits into the 4% target

Malhotra underlined that the 2-6% range is primarily meant to accommodate fluctuations around the 4% target. He said it is neither possible nor advisable to keep inflation “pegged” in a very narrow range, which is why the framework allows swings, even if the focus remains on 4%.

The governor rejected the idea that the RBI is prioritising growth over inflation or shifting its focus to the tolerance band. His remarks were aimed at clarifying that the band is not the objective itself, but a design feature to manage real-world volatility.

Recent inflation prints and RBI’s view on very low inflation

The RBI also flagged that ultra-low inflation readings are “neither sustainable nor desirable” for a fast-growing economy. Malhotra said inflation around 0.2% to 0.25% is “too low” for India, reiterating that the central bank targets 4%.

In the same set of updates, the RBI cited recent data points showing headline CPI inflation in June at 2.1%, described as a 77-month low. Retail inflation in July fell to 1.55%, noted as an eight-year low, and below the RBI’s 2-6% target range, largely driven by a drop in food prices. The RBI added that recent prints were shaped by base effects and unusually sharp corrections in food prices.

What the RBI expects for the next quarters

The RBI’s revised outlook for CPI inflation in Q1 and Q2 of the next year was cited at 4% and 4.2% respectively, described as “benign and near the inflation target”, even after a slight upward revision.

At the same time, the central bank indicated that while inflation could undershoot the target in the near term, headline inflation is projected to inch up from Q3 onwards. This framing reinforces the RBI’s preference to focus on persistence rather than single prints.

Framework background: why 4% remains the anchor

RBI Deputy Governor Poonam Gupta said the 4% inflation target remains appropriate for India’s economic conditions, citing domestic experience, stakeholder feedback and global evidence. She said India is “in the right company” for its level of income, per capita income, size and economic complexity to target 4% inflation, adding there is “very little reason to be moving away from this target for now.”

India adopted the inflation targeting framework in 2016 after amendments to the RBI Act. Under this framework, the MPC is mandated to maintain headline CPI inflation at 4% with a tolerance band of plus or minus 2 percentage points.

The framework was reviewed and renewed most recently on March 28, 2026, for another five years through March 31, 2031, retaining the original 4% target.

Market impact: what the message changes for investors

The immediate market takeaway from the RBI’s communication is a clearer separation between short-term inflation volatility and medium-term policy intent. By emphasising persistence and breadth of price pressures, the RBI signalled it will not react automatically to temporary moves, including very low food-led prints.

At the same time, the upward revision in the FY27 inflation estimate to 5.1% keeps the focus on inflation risks. Investors typically read such revisions as a reminder that the disinflation trend may not be linear, and that policy decisions will remain data-dependent rather than pre-committed.

Analysis: why “sacrosanct” language matters

Calling the 4% target “sacrosanct” is not just rhetoric. It reinforces the credibility of the inflation-targeting framework at a time when questions are being asked about growth-inflation trade-offs. Malhotra’s remarks also seek to anchor expectations that the target is the objective, while the 2-6% range is a buffer for shocks.

Gupta’s defence of the framework adds a second layer of institutional support. With the target renewed through 2031, the RBI’s job becomes less about redefining the goal and more about calibrating actions so inflation converges over time without destabilising growth.

Conclusion

The RBI has reiterated that the 4% medium-term inflation target remains unchanged and “not in abeyance”, even as it acknowledges a more adverse inflation outlook and raises the FY27 CPI estimate to 5.1%. With the repo rate held at 5.25% and policy action tied to persistence and breadth of price pressures, the next steps will depend on incoming inflation data and how broadly price rises spread across the economy.