RBI Maintains Steady Rates, Optimistic Outlook on Growth and Inflation
The Reserve Bank of India (RBI) announced on Thursday that it will maintain the policy repo rate at 5.25%, a decision reached unanimously by the Monetary Policy Committee (MPC). This move comes as the RBI slightly adjusted its growth and inflation forecasts for the near term. Despite external challenges, including geopolitical tensions and trade issues, the RBI governor emphasized that domestic economic conditions remain favorable.
Monetary Policy Decision
The RBI’s decision to keep the repo rate unchanged reflects a cautious approach amid increasing external pressures. The standing deposit facility rate remains at 5%, while both the marginal standing facility rate and the bank rate are set at 5.5%. The MPC has also decided to maintain a neutral stance, indicating that it will continue to monitor economic conditions closely. RBI Governor Sanjay Malhotra explained that the current policy rate is deemed appropriate, allowing the central bank to navigate the complexities of the global economic landscape while supporting domestic growth.
Growth Projections Revised Upwards
In its latest assessment, the RBI has raised its growth projections for the first half of the upcoming financial year. The real GDP growth forecast for 2025-26 remains steady at 7.4%. However, for the April to June quarter of 2026-27, growth expectations have been increased to 6.9%, up from a previous estimate of 6.7%. Similarly, the July to September quarter forecast has been adjusted to 7%, reflecting a positive outlook for the Indian economy. The RBI has chosen to defer its full-year growth forecast for 2026-27 until the April policy review, citing the anticipated release of a new GDP series.
Inflation Forecasts and Risks
The RBI has also revised its inflation forecasts for the first half of the next financial year. The Consumer Price Index (CPI) inflation for 2025-26 is now projected at 2.1%, with the March quarter expected to see inflation at 3.2%. For the first quarter of 2026-27, the inflation estimate has been raised to 4%, while the second quarter is now projected at 4.2%. Governor Malhotra attributed these adjustments primarily to rising prices of precious metals, although he noted that underlying inflation pressures remain subdued. He cautioned that geopolitical uncertainties, energy price volatility, and adverse weather conditions could pose risks to inflation, particularly in light of base effects from previous price declines.
External Trade and Capital Flows
On the external front, the RBI reported a 1.9% year-on-year growth in India’s merchandise exports for the third quarter of 2025-26, while imports surged by 7.9%, resulting in a widening trade deficit. However, the governor expressed optimism that robust services exports and strong inward remittances would help maintain a moderate and sustainable current account deficit. The recent India-EU free trade agreement and potential trade deals with the US are expected to bolster exports and enhance India’s integration into global value chains. Despite mixed capital flows, with foreign portfolio investors experiencing net outflows of $5.8 billion, foreign direct investment inflows remain strong. As of January 30, India’s foreign exchange reserves stood at $723.8 billion, providing over 11 months of import cover. The RBI has also implemented liquidity-augmenting measures to ensure adequate liquidity and effective monetary policy transmission.
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