RBI keeps policy rate unchanged at 5.50%, retains neutral stance
After three successive interest rate cuts, the Monetary Policy Committee (MPC) under the Reserve Bank of India (RBI) at its third bi-monthly monetary policy of the current fiscal (FY26) has kept the policy rate unchanged at 5.50% and retained the neutral stance, weighed by concerns over tariff uncertainties. Consequently, the standing deposit facility (SDF) rate under the liquidity adjustment facility (LAF) remains unchanged at 5.25% and the marginal standing facility (MSF) rate and the Bank Rate at 5.75%. This decision is in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth. Since February 2025, the RBI has reduced the policy rate by 100 basis points.
RBI Governor Sanjay Malhotra said that the growth rate projection for FY26 has been retained at 6.5%. it also retained Q1 growth projection at 6.5%, Q2 at 6.7%, Q3 at 6.6%, and Q4 at 6.3%. It highlighted that the above normal southwest monsoon, lower inflation, rising capacity utilization and congenial financial conditions continue to support domestic economic activity. It also said the services sector is expected to remain buoyant, with sustained growth in construction and trade in the coming months. However, it noted that the headwinds emanating from prolonged geopolitical tensions, persisting global uncertainties, and volatility in global financial markets pose risks to the growth outlook.
With regard to inflation forecast, it has lowered the projection to 3.1% from the earlier estimate of 3.7% for FY26. Large favourable base effects combined with steady progress of the southwest monsoon, healthy kharif sowing, adequate reservoir levels and comfortable buffer stocks of foodgrains have contributed to this moderation. Besides, it projected Q2 inflation at 2.1%; Q3 at 3.1%; and Q4 at 4.4%. Lower food inflation that entered deflationary territory in June likely to support the average CPI inflation this year to remain significantly below the target. However, CPI inflation is likely to edge up above 4% by Q4FY26 and beyond, as unfavourable base effects, and demand side factors from policy actions come into play. It noted that barring any major negative shock to input prices, core inflation is likely to remain moderately above 4% during FY26.
