Upside risks to inflation and downside risks to growth amid the continuing uncertainty about the duration and intensity of the West Asia conflict prompted the six-member rate-setting panel to unanimously stand pat on the repo rate in its third meeting on the trot.
The repo rate (the interest rate at which banks borrow funds from the RBI to overcome short-term liquidity mismatches) is currently at 5.25 per cent. The MPC also continued with the neutral monetary policy stance. The RBI upped the FY27 retail inflation projection 5.1 per cent (earlier projection: 4.6 per cent) and cut the real GDP growth projection to 6.6 per cent (6.9 per cent).
The central bank, on its part, announced crucial measures to attract foreign capital, via Foreign currency non-resident (bank) deposits,external commercial borrowings by public sector undertakings, government securities and equity investments.
The aforementioned measures, which could bring in about $40 billion of capital flows, buoyed the rupee, which appreciated 84 paise on Friday to close at 94.9450/dollar.
While retail inflation is projected above 5 per cent from Q2 onwards (above MPC’s 4 per cent target but below its upper tolerance level of 6 per cent), economists are divided on the future rate trajectory, with some expecting the committee to stay on hold in FY27 and others seeing a 25 basis points hike in its next meeting in August.
Pass-through of higher global energy prices to retail fuel prices, commercial LPG, industrial raw materials, chemicals, ruber and plastic products and their second-round impact could exert upside pressure on retail inflation, per the monetary policy statement.
Governor Sanjay Malhotra observed that the underlying inflation pressures continue to remain benign (with the April 2026 inflation reading at 3.5 per cent) at this juncture. However, he cautioned that generalisation of inflation through second-round effects on expectations and wages is a distinct possibility, warranting a close vigil.
The Governor emphasised that it is the MPC’s endeavour to meet the 4 per cent retail inflation target over the medium term.
“It is not advisable to take action for each and every small deviation from the target because that can have consequences which can be disproportionate for growth….We will be data dependent. We have to watch and see as to whether the effect of this supply shock is going to persist or going to wane,” he said.
Referring to the status quo on repo rate, Malhotra remarked that MPC was of the opinion that there are considerable risks to the baseline assessment of inflation and growth due to the uncertainty about the duration and intensity of the conflict, magnitude of its spillover effects and the pace of restoration of supply chains.
“…Although risks of higher inflation have amplified, the MPC felt it would be prudent to wait for greater clarity to emerge,” he said.
oil prices
Malhotra noted that the adverse implications of the extended disruption in supply chains and elevated energy prices are reflected in the moderation of growth and increase in inflation projections from the April policy. He said international crude oil prices (Indian basket) have averaged around US$110/barrel in April-May 2026, and indications are that average oil prices for 2026-27 would be substantially higher than what was assumed ($85 per barrel) during the last policy statement.
The Governor stated that going ahead, the rise in prices of energy and other inputs, coupled with supply disruptions, is likely to weigh on economic activity. CS Setty, Chairman, State Bank of India and Indian Banks Association (IBA), said the RBI has struck a prudent balance by preserving growth while simultaneously addressing the external uncertainties.
“The measures announced to attract foreign capital are timely and comprehensive. These steps should help enhance capital inflows, deepen bond markets, improve liquidity and provide support to the rupee,” he said.
Published on June 5, 2026
