RBI keeps repo at 5.25% as hikes shift to Oct-Dec

Policy decision: repo unchanged, stance stays neutral

The Reserve Bank of India (RBI) has kept the repo rate unchanged at 5.25% and retained its “neutral” monetary policy stance, with Governor Sanjay Malhotra pointing to rising risks rather than a clear, immediate inflation spike. The policy choice signals a continued wait-and-watch approach even as the central bank has lifted its inflation projections for 2026-27. Malhotra cited the prolonged West Asia conflict, elevated energy prices, supply-chain disruptions, and weather-related uncertainties as key threats to the inflation outlook. The Monetary Policy Committee (MPC) also reiterated that it will remain data-dependent. That emphasis matters because recent inflation prints have been mixed, and the next few months will be influenced by food prices and fuel costs.

Why a near-term rate move looks less likely

Market expectations in the report point to a low probability of an immediate move at the upcoming August meeting, despite the RBI flagging higher inflation risks. Economists polled by Informist said that after the policy decision, an interest rate hike is widely expected in FY27 (Apr-Mar) but not in August. ICICI Securities Primary Dealership’s Abhishek Upadhyay said the “bar should be low” for an August hike and placed the base case in October, adding that “for August, there are low expectations.” A separate strand of commentary in the report also suggests that most economists see a rate hike only in the December quarter, when more data could clarify the inflation impact of higher energy prices and the southwest monsoon.

RBI’s FY27 inflation map: higher average, front-loaded risks

The RBI expects CPI inflation to average 5.1% in 2026-27. It projected quarterly inflation at 4.2% in Q1, 5.1% in Q2, 5.9% in Q3 and 5.4% in Q4, and also referenced core inflation at 4.7% for the year. The central bank attributed the higher inflation outlook to rising energy and commodity prices, continued supply disruptions and uncertainty around the south-west monsoon. While the policy statement noted inflation could rise towards the upper tolerance band in the third quarter, it also said the effect of the current supply shock may begin to moderate thereafter. This combination explains the preference to wait for more clarity while monitoring inflation expectations and second-round effects.

What Yes Securities is watching: Q1FY27 may undershoot 4.2%

Yes Securities expects the headline Consumer Price Index (CPI) for Q1FY27 to fall below the RBI’s forecast of 4.2%, helped by the May inflation print of 3.93% year-on-year and favourable base effects. In its arithmetic, June inflation would need to exceed 5% for Q1FY27 inflation to align with the RBI’s 4.2% forecast. Yes Securities’ projections for June indicate a shortfall, which the note said could give the RBI more reassurance to postpone rate hikes. At the same time, the brokerage highlighted rising trends in vegetable prices, core services and fuel costs, along with an impending El Nino risk, as reasons the RBI is likely to remain data-dependent rather than move pre-emptively.

Monsoon and El Nino: the domestic risk RBI keeps repeating

A likely deficient south-west monsoon and the possibility of El Nino conditions emerged as major domestic risks in the policy communication. Malhotra said the performance of the southwest monsoon will be crucial for both the farm sector and the inflation trajectory, and that any significant rainfall shortfall could affect agricultural output and food prices. The concerns resurfaced after the India Meteorological Department projected Southwest Monsoon 2026 rainfall at 90% of the Long Period Average (LPA), categorising it as “below normal.” Economists also warned that a combination of deficient rainfall, elevated energy prices and a weaker rupee could intensify price pressures.

Energy prices and supply chains: external shocks feeding inflation risk

The RBI explicitly linked its higher inflation outlook to energy and commodity prices, and to supply disruptions. The policy statement also pointed to the prolonged West Asia conflict as a factor behind elevated energy prices and supply-chain uncertainty. This matters because higher input costs can be passed through to consumers over time, raising headline inflation even if current prints are manageable. The central bank’s approach, as described in the statement, is to watch for second-round effects before acting. That framing supports the view in the report that the MPC is choosing to hold rates steady for now despite acknowledging heightened risks.

A look back: low inflation prints and earlier rate levels

The article also references an earlier period of low inflation and different policy settings. It notes that CPI inflation fell to a 77-month low of 2.1% in June, taking the average April-June quarter inflation to 2.69% versus the RBI estimate of 2.9%. In the June policy referenced, the RBI projected FY26 CPI inflation at 3.7%, with quarterly estimates of 2.9% for Q1, 3.4% for Q2, 3.9% for Q3 and 4.4% for Q4. Separately, the report mentions that in August 2025 the MPC maintained the repo rate at 5.5%, supported by resilient domestic growth and CPI inflation of 2.1% in June.

Government view: room for easing as core stays subdued

Ahead of an August MPC announcement referenced in the report, the finance ministry’s June Monthly Economic Review said core inflation would remain subdued, with overall inflation comfortably below the RBI’s 4% target. The review argued this “afford[s] room for the easing cycle to be sustained,” and added that it appears likely that full-year inflation could undershoot the RBI’s FY26 expectation of 3.7%. The same note said that with inflation within the target range and monsoon progress on track, the domestic economy enters Q2 of FY26 on a relatively firm footing. This stands in contrast to the RBI’s later emphasis on elevated energy prices and monsoon uncertainty as upside risks.

Key numbers at a glance

Market impact: what “data-dependent” means for rate expectations

The report’s central takeaway is that rate expectations are shifting from an August move towards later meetings, with October and the December quarter repeatedly cited. The logic is that if June-quarter inflation undershoots the RBI’s projection, the case for an early hike weakens. But the RBI’s own FY27 projection profile shows inflation rising sharply into Q3, which keeps the broader tightening narrative alive for later in the year. For investors, the immediate implication is a continuation of policy uncertainty driven by incoming inflation and monsoon data rather than a pre-announced path. For households and businesses, the RBI’s message signals vigilance on food and fuel inflation, even as it avoids immediate tightening.

Conclusion

The RBI’s decision to keep the repo rate at 5.25% and maintain a neutral stance reflects its preference to wait for clearer inflation signals amid monsoon and energy-related risks. Based on the views cited, markets are leaning toward a rate move later in 2026, with October and the December quarter emerging as key windows. The next major signposts will be the June inflation print, subsequent food and fuel inflation trends, and the evolution of the southwest monsoon and El Nino risk as the MPC updates its assessment.