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The Reserve Bank of India's Monetary Policy Committee (MPC) on Wednesday decided to keep the benchmark repo rate unchanged at 5.25 per cent while retaining its 'neutral' policy stance, citing the need for greater clarity on the inflation trajectory amid uncertainties surrounding the southwest monsoon, El Nino, geopolitics and global trade policy.
According to the Monetary Policy Statement by RBI Governor Sanjay Malhotra, the central bank also retained the Standing Deposit Facility (SDF) rate at 5.0 per cent, while keeping the Marginal Standing Facility (MSF) rate and the bank rate unchanged at 5.5 per cent following the conclusion of its three-day meeting. Malhotra said headline inflation is projected to increase, primarily due to supply-side pressures from food and fuel, while core inflation remains moderate and is expected to decline after peaking in the third quarter. He added that greater clarity is needed on the inflation trajectory and its composition before taking any policy action. The RBI has projected Consumer Price Index (CPI) inflation at 5.0 per cent for the current financial year, 10 basis points lower than its earlier estimate, with quarterly projections placed at 5.3 per cent in Q1, 4.7 per cent in Q2, 5.9 per cent in Q3 and 5.5 per cent in Q4. Core inflation for the financial year has been projected at 4.3 per cent. The Governor said, "Core inflation, excluding precious metals is projected to be lower than core, although it is likely to align with core inflation towards the end of the financial year." He said the rise in inflation in June was primarily driven by higher food and fuel prices, including fuel-induced inflation. Despite higher input costs, core inflation, excluding food and fuel, remained unchanged at 3.9 per cent in May and June. Malhotra said the impact of El Nino on the temporal and spatial distribution of rainfall remains a major risk, while global oil prices have witnessed sharp two-way movements due to geopolitical developments, clouding the near-term inflation outlook. Although broad-based inflationary pressures remain modest, he cautioned that second-round effects from higher food, fuel and other input costs could spill over into wider inflation. On liquidity conditions, the Governor said, "Going ahead, the usual return of currency during the monsoon season, drawdown of government cash balances, and our special measures to attract capital inflows are expected to aid banking system liquidity in the near term." He added, "Short-term money market rates, especially rates of commercial papers and certificates of deposit, moderated in July." On agriculture, Malhotra said the outlook remains clouded by deficient and uneven southwest monsoon rainfall under El Nino conditions. However, reservoir levels remain close to normal, while government initiatives such as crop diversification, promotion of short-duration and climate-resilient crops, along with water harvesting and conservation measures, are expected to mitigate the adverse impact of deficient rainfall. He added that while manufacturing could face cost pressures, increasing diversification of global supply chains should help cushion the impact. The Governor further said supply-side pressures arising from the West Asia conflict had eased somewhat since June 2026, but the renewed escalation since the first week of July has increased volatility in energy prices and revived uncertainty over global supply chains. (ANI)
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