RBI’s Monetary Policy Review

On August 05, 2026, RBI’s Monetary Policy Committee (MPC) made following policy decisions:

The RBI’s MPC voted unanimously to keep the repo rate unchanged at 5.25%. The MPC also decided to continue with the neutral monetary policy stance.

Executive summary of RBI’s press releases/ press conference

Global Economy:

• The West Asia conflict is hurting the global economy by disrupting major trade routes and supply chains . This disruption is increasing market volatility and weakening business confidence.
• Trade uncertainty continues as the US has imposed new tariffs.
• The global economic environment is becoming more unstable.
• Global growth is expected to slow down, while inflation for 2026 is projected to be higher vs. previous year.
• Some central banks have raised interest rates, while others remain cautious.
• Crude oil prices, currency markets and financial markets continue to fluctuate due to the uncertainty and changing intensity of the West Asia conflict.

Domestic Growth:

• Despite global uncertainty, India’s domestic economic activity remained strong in Q1 FY27, as shown by various high-frequency indicators.
• Private consumption was boosted by strong discretionary spending.
• Investment activity stayed steady, helped by continued government spending on infrastructure and construction.
• Weak monsoon may impact rural consumption, but allied farm activities and government schemes could cushion the effect.
• Urban consumption should stay supported by strong services activity and stable employment conditions.
• Investment activity should continue the back of high-capacity utilization, healthy credit growth and government focus on infrastructure.
• Real GDP growth for FY27 is projected at 6.7%. Overall risks to growth are evenly balanced.

Source : RBI

Domestic Inflation:

• CPI inflation rose to 4.4% in June 2026 after staying below the target for 16 straight months.
• El Niño continues to pose a major risk due to its impact on rainfall distribution.
• However, proactive supply management and adequate foodgrain stocks provide some comfort.
• Global oil prices remain highly volatile due to geopolitical events, making the near-term outlook uncertain.
• While overall inflation pressures are still moderate, there is a risk that higher food, fuel and input prices could spill over into broader inflation.
• CPI inflation for FY27 is projected at 5.0% while core inflation (ex-food and fuel) is projected at 4.3%.

Liquidity and Financial Market Conditions:

• Banking system liquidity averaged a daily surplus of INR 1.0 lakh cr since the June 2026 MPC meeting.
• Liquidity in the banking system is expected to improve further due to the usual return of currency during monsoon, government cash balance drawdown and special measures to attract capital inflows.
• Short-term money market rates, especially CP and CD rates, softened in July.
• Transmission in the credit market slowed during May–June due to rising deposit and lending rates.
• RBI will continue using two-way operations to ensure adequate liquidity in the banking system.
• The aim will be to keep the weighted average call rate aligned with the policy repo rate.

Outlook:

• We see the RBI’s FY27 outlook as slightly more constructive, with CPI inflation revised down by 10 bps and GDP growth revised up by 10 bps.
• The RBI’s overall tone of the inflation commentary appears dovish.
• In our view, the RBI remains cautious, and any tightening is likely to depend on sustained, broad-based inflation pressures rather than temporary increases in food or oil prices.
• While an October rate hike looks unlikely, we continue to expect the RBI to begin its rate-hiking cycle in FY27, with a 25 bps increase potentially materializing by the Feb 2027 meeting.