IGI Logo

* The MPC unanimously kept the repo rate unchanged at 5.25% and retained the neutral policy stance, as widely expected. The RBI acknowledged that domestic macroeconomic fundamentals remain resilient despite an uncertain global backdrop. It raised its FY27 GDP growth forecast to 6.7% (from 6.6%), while lowering its FY27 CPI inflation forecast to 5.0% (from 5.1%). The RBI expects inflation to peak at 5.9% in 3QFY27 before moderating gradually.

* No urgency to raise rates: The RBI highlighted that greater clarity is needed on the path and composition of inflation before taking any policy action. This indicates that the MPC is focused on whether the current food- and fuel-driven inflation spills over into broader price pressures and pushes up core inflation (core inflation is expected at 4.3% in FY27 in the Aug’26 policy, lower from 4.7% in the Jun’26 policy). As a result, the Governor effectively signaled that there is no urgency to raise policy rates despite headline CPI moving above the 4% target.

* Liquidity conditions remain comfortable, with the average daily liquidity surplus moderating to around INR1.0t (Jul’26). The capital-flow measures announced in the June policy, particularly the FCNR(B) deposit scheme, have already started yielding results, reflected in improving debt FPI inflows, a stronger BoP outlook, and rising foreign exchange reserves (USD692.9b). We continue to expect these measures to generate cumulative inflows of around USD75–80b in FY27, supporting the INR, forex reserves, and domestic bond markets.

* Inflation is projected to remain above 5% at 5.9% in 3QFY27, 5.5% in 4QFY27, and 5.3% in 1QFY28. This implies that the real policy rate is likely to turn negative if the repo rate remains unchanged at 5.25%. At the same time, bank credit growth remains exceptionally strong at 18.6% YoY (as of 27th June 2026), a pace that, if sustained, could become increasingly inflationary by supporting robust domestic demand. We believe the inflation risk is still tilted to the upside if El Niño intensifies during the rabi season, leading to higher food inflation than currently envisaged by the RBI. Under such a scenario, inflation could exceed the RBI's current baseline forecast of 5.3% for 1QFY28. In addition, we expect the US Fed to deliver a 25bp rate hike in Dec’26/Jan’27 as sticky inflation keeps policy restrictive. A stronger US dollar and tighter global financial conditions would increase pressure on EM currencies, including the INR. Accordingly, while we expect the RBI to remain on hold through CY26, the window for policy tightening is likely to open next year. We expect the RBI to deliver a cumulative 75–100bp rate hike depending on data, implemented through calibrated 25bp increases at successive MPC meetings

Our view:

* The August policy reinforces the RBI's cautious, data-dependent approach while distinguishing between temporary supply-driven inflation and underlying price pressures. While the RBI has upgraded its FY27 growth forecast to 6.7% (+10bp) and lowered its inflation forecast to 5.0% (-10bp), it continues to expect inflation to remain elevated, peaking at 5.9% in 3QFY27 and staying above 5% for three consecutive quarters.

* The RBI highlighted that greater clarity is needed on the path and composition of inflation before taking any policy action. This indicates that the MPC is focused on whether the current food- and fuel-driven inflation spills over into broader price pressures and pushes up core inflation (core inflation is expected at 4.3% in FY27 in the Aug'26 policy, lower from 4.7% in the Jun'26 policy), rather than reacting to temporary supply-side shocks. As a result, the Governor has effectively signaled that there is no urgency to raise policy rates despite headline CPI moving above the 4% target. We therefore do not expect any rate hike during CY26.

* Liquidity conditions also remain comfortable despite a gradual normalization, with the average daily liquidity surplus moderating to around INR1.0t, while the RBI has reiterated its commitment to conduct two-way liquidity operations to keep money market rates aligned with the policy repo rate. The capital-flow measures announced in the June policy, particularly the FCNR(B) deposit scheme, have already started yielding results, reflected in improving debt FPI inflows, a stronger BoP outlook, and rising foreign exchange reserves (USD692.9b). We continue to expect these measures to generate cumulative inflows of around USD75-80b in FY27, supporting the INR, forex reserves and domestic bond markets.

* Inflation is projected to remain above 5% for three consecutive quarters – at 5.9% in 3QFY27, 5.5% in 4QFY27 and 5.3% in 1QFY28. This implies that the real policy rate is likely to turn negative if the repo rate remains unchanged at 5.25%. At the same time, bank credit growth remains exceptionally strong at 18.6% YoY (as of 27th June 2026), a pace that, if sustained, could become increasingly inflationary by supporting robust domestic demand. We believe the inflation outlook is still tilted to the upside, particularly if El Niño intensifies during the rabi season, leading to higher food inflation than currently envisaged by the RBI. Under such a scenario, inflation could exceed the RBI's current baseline forecast of 5.3% for 1QFY28. In addition, we expect the US Fed to deliver a 25bp rate hike in Dec'26/Jan’27 as sticky inflation keeps policy restrictive. A stronger US dollar and tighter global financial conditions would increase pressure on EM currencies, including the INR. Accordingly, while we expect the RBI to remain on hold through CY26, the window for policy tightening is likely to open in early next year. We expect the RBI to deliver a cumulative 75-100bp of rate hikes depending on data, implemented through calibrated 25bp increases at successive MPC meetings.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412