RBI holds repo at 5.25%, lifts FY27 CPI to 5.1%

Policy decision: rates on hold, stance stays neutral

The Reserve Bank of India (RBI) kept the policy repo rate unchanged at 5.25% and retained its neutral stance. The decision was unanimous, with all members of the rate-setting panel voting to hold rates. The central bank framed the decision against a backdrop of a weakening rupee, rising bond yields, costly oil, and foreign outflows. RBI Governor Sanjay Malhotra said underlying inflation pressures remain benign even as headline inflation is expected to rise. The central bank’s message was that policy settings can stay steady while liquidity and external-sector measures do more of the heavy lifting.

Why RBI moved beyond rates: rupee stress and dollar demand

Alongside the rate decision, the RBI unveiled measures aimed at drawing in more dollars. The central bank’s stated objective was to shore up the rupee and address the pressures created by expensive crude oil and foreign outflows. In this context, the package leaned on government securities (G-Secs), foreign portfolio investors (FPIs), and foreign currency non-resident (FCNR) deposits. The RBI also indicated that it would use targeted tools like concessional swaps to influence the cost and availability of hedged dollar funding.

Six measures to boost inflows: what was announced

The steps announced included tax changes and incentives that affect foreign investors, banks, and borrowers. The government said it will scrap capital gains tax for foreign holders of government bonds and removed the 20% tax on interest earned from such investments. Separately, the RBI said it will offer concessional forex swaps until September 30 to encourage state-owned firms to tap dollar borrowings. It also said it will compensate banks for hedging costs on 3-year and 5-year FCNR deposits aimed at the Indian diaspora. The broader thrust of the package was to increase the attractiveness of rupee debt for foreign investors while making hedged dollar deposits and borrowings cheaper.

Inflation outlook: FY27 projection raised to 5.1%

The RBI increased its inflation forecast for FY27, lifting the full-year retail inflation projection to 5.1% from 4.6% earlier. The revision was linked in the coverage to the West Asia war and its implications for prices, including through oil. For the first two quarters of FY27, CPI inflation was pegged at 4% and 4.4%. Malhotra said that while inflation is expected to rise, underlying price pressures remain benign at this point. The RBI also projected core inflation at 4.7%, higher than its earlier projection of 4.4%.

Growth forecasts: GDP estimate lowered for the current year

The central bank updated its economic forecasts for the current financial year, cutting the GDP growth projection to 6.6% from 6.9% forecast in April. Separately in the provided material, GDP growth in the year ended March 31, 2026 was expected to be 7.6%. The RBI’s growth assessment sits alongside its inflation call, with the policy stance remaining neutral and the repo rate unchanged. The headline message was that growth is moderating while inflation risks have moved up, particularly due to external developments.

Inflation target framework: 4% goal extended to March 2031

This policy cycle also follows a fresh reaffirmation of India’s inflation framework. The government asked the RBI to maintain retail inflation at 4%, with a margin of 2% on either side, for another five years ending March 2031. That keeps the formal tolerance band at 2% to 6%. In the same set of reports, retail inflation was described as remaining within the tolerance band in the current fiscal year, which provides room for the RBI to hold rates steady. The updated projections and the unchanged stance indicate the RBI is balancing the inflation target with growth and external stability.

Market reaction: rupee steady after the decision

The rupee traded steady after the RBI left the repo rate unchanged at 5.25%. The policy package was positioned as a response to a difficult external environment, including foreign outflows and elevated oil costs. The combination of steady rates and external-sector measures is designed to influence flows and hedging costs without changing the headline policy rate. Reports also referenced a context of rising bond yields, underscoring that external and market conditions were central to the RBI’s communication.

Key numbers at a glance

Measures to attract dollars: tools and intended channel

Why this matters for investors and borrowers

For bond markets, the tax changes for foreign investors directly affect post-tax returns on government bonds, which can influence demand for G-Secs. For banks, the RBI’s decision to compensate hedging costs on specified FCNR tenors can change the economics of mobilising foreign currency deposits from non-resident Indians. For state-owned firms and other borrowers, concessional swaps and subsidised hedging costs can reduce the all-in cost of raising dollars when properly hedged. And for currency markets, the package targets both flows and hedging, two levers that can influence rupee stability during periods of elevated external stress.

Conclusion

The RBI’s latest policy keeps the repo rate unchanged at 5.25% with a neutral stance, while shifting emphasis to measures that can attract capital inflows and ease dollar funding conditions. At the same time, the central bank raised its FY27 inflation projection to 5.1% and trimmed the current-year growth forecast to 6.6%. The next market focus will be on how quickly the announced tax and swap-related measures translate into measurable bond flows, deposit mobilisation, and hedged dollar borrowing before the September 30 swap window closes.