RBI Monetary Policy 2026: Repo at 5.25%, FY27 at 6.6%

Policy decision: repo rate held at 5.25%

The Reserve Bank of India (RBI) kept the policy repo rate unchanged at 5.25% in its June monetary policy meeting. The central bank retained a neutral policy stance, highlighting the need to balance growth support with inflation and external-sector risks. The policy discussion comes against the backdrop of rising crude oil prices and a weakening rupee. The RBI signalled that macro stability remains central to sustaining the growth cycle. It also noted that external conditions and supply chain continuity matter for the medium-term trajectory. The decision to hold rates follows earlier easing, with the policy repo rate having been reduced by 25 basis points to 5.25% in a unanimous decision at a previous MPC meeting for 2025-26.

Growth outlook: FY27 forecast cut to 6.6%

The RBI lowered its GDP growth projection for FY27 to 6.6% from 6.9% earlier. It linked the downgrade to the Middle East crisis, elevated crude oil prices, and disruptions to the Southwest monsoon. These factors can influence input costs, inflation dynamics, and rural demand, while also affecting the external account through higher import bills. Even with the cut, the central bank’s communication described the near-term outlook as favourable in its State of the Economy bulletin, supported by consumption, investment and productivity-enhancing reforms. The RBI also highlighted that maintaining macro stability and ensuring supply chains remain intact are key conditions for India to be on the brink of achieving a robust 7% growth in FY28. In the same broader set of updates, India’s economy was described as resilient, including a 7.7% GDP growth print for FY26.

FY26 momentum: strong quarterly numbers and consumption

Recent national accounts data cited in the context showed India’s real GDP grew 8.2% in Q2 FY 2025-26, beating expectations of around 7% and marking the fastest pace in six quarters. The expansion was supported by stronger activity in the secondary and tertiary sectors, particularly manufacturing, construction and financial services. Consumption improved, rising 7.9% during the quarter, while nominal GDP grew 8.7%. Separately, the RBI’s February State of the Economy bulletin pointed to steady industrial output, firm services activity, and stronger sales growth among listed companies, with manufacturing showing double-digit expansion in several industries. Services companies were reported to have stable revenue growth, indicating continued demand momentum.

Inflation and the policy trade-off

The RBI’s rate hold was framed as a balancing act between inflation risks and growth support. The risk set identified in the updates included higher energy costs and supply interruptions. In the February bulletin, the RBI said inflation is expected to remain close to the target in the near term, supporting macroeconomic stability. It also pointed to relatively contained price pressures, with core inflation excluding precious metals at 1.9%, and food inflation easing on softer vegetable prices. In another policy communication, inflation forecasts for the next year were described as lowered to 2%, comfortably within the RBI’s 2-6% comfort band. The RBI also provided a quarterly inflation break-up in its published guidance, including 0.6% for Oct-Dec and 2.9% for Jan-Mar, alongside revisions to projections for Apr-Jun FY27 (3.9% from 4.5%) and Jul-Sept FY27 (4%).

Rupee pressure and RBI’s forex interventions

Currency volatility was a major part of the macro narrative. The RBI’s annual report said the rupee weakened nearly 10% in FY26 due to trade uncertainties, a wider deficit, the Middle East conflict and FII outflows. It said the RBI intervened in forex markets and expanded measures such as SRVAs and local currency arrangements to stabilise the currency and reduce volatility. In FY26, the RBI earned ₹169,000 crore from foreign exchange transactions, up 52% year-on-year, after selling a record $13.13 billion from forex reserves to support the rupee amid a 9.5% depreciation. Separately, market reporting noted the rupee broke below the 90-per-dollar mark on a Friday session, extending to a second straight weekly decline amid year-end dollar demand.

External sector: exports, trade deficit and current account

Trade and capital flows were mixed in the data points cited. Merchandise exports grew 12.7% to $17.021 billion in April, marked as the highest growth in the calendar year. In October, merchandise exports contracted 11.9% year-on-year to $14.4 billion, while imports rose 16.6% to $16.0 billion, widening the trade deficit. Services exports in October stood at $15.2 billion, up 2.2%, while services imports rose 2.9% to $17.7 billion, leaving net services exports at $17.4 billion. The current account deficit moderated to 2.2% of GDP in Jul-Sept from 1.3% a year earlier, supported by robust services exports and strong remittances.

Liquidity and transmission: OMOs and a dollar-rupee swap

The RBI also detailed liquidity conditions and tools used to manage them. System liquidity, measured by the net position under the Liquidity Adjustment Facility, averaged a daily surplus of INR 1.5 trillion (₹150,000 crore) since the MPC last met in October. To inject durable liquidity, the RBI said it will conduct open market bond purchases of INR 1.00 trillion (₹100,000 crore), along with a three-year dollar-rupee buy-sell swap of $1 billion in December. It also noted transmission after cumulative policy rate cuts, with the weighted average lending rate of scheduled commercial banks down 69 bps for fresh rupee loans during Feb-Oct, and deposit rates on fresh term deposits down 105 bps over the same period.

Investment and trade agreements: what RBI flagged

On the domestic investment cycle, the RBI bulletin said total fundraising for capital expenditure during April-Dec FY2026 was higher than 2019-20, signalling firm investment appetite. It added that while banks and financial institutions sanctioned a lower total cost of new capex projects in Q3 versus the prior quarter, the approved amount still exceeded the post-pandemic average. On trade policy, the RBI said twin trade agreements with the European Union and an interim trade deal with the United States are expected to improve market access, enhance export competitiveness and integrate Indian firms more deeply into global value chains over the coming years.

Key numbers at a glance

Why the policy stance matters for markets

The combination of a steady repo rate and a neutral stance keeps the RBI’s messaging focused on flexibility as inflation and external risks evolve. The explicit reference to crude prices and rupee weakness reflects the sensitivity of inflation and the current account to energy imports. The growth downgrade for FY27, even as recent GDP prints remain strong, places attention on shocks such as geopolitics and weather-related disruptions. Currency and liquidity operations remain important market signals, given the scale of FY26 forex intervention and the announced OMO and swap operations. For investors, the data points on exports, services trade and FDI flows provide a snapshot of where India’s external resilience is coming from and where vulnerabilities remain.

Conclusion

The RBI’s latest policy communication keeps the repo rate at 5.25% while acknowledging both strong recent growth and near-term risks from crude, currency pressures and supply disruptions. Its FY27 growth forecast has been reduced to 6.6%, and its actions on liquidity and forex markets underline its focus on stability. The next cues for markets will come from upcoming inflation prints, progress on external trade conditions, and the RBI’s execution of the announced bond purchases and dollar-rupee swap.