Reserve Bank of India Holds Rates Steady Amid Inflation Risks

The Reserve Bank of India maintained its policy repo rate at 5.25% and retained a neutral stance during its August 5 meeting, according to minutes released on August 19. Governor Sanjay Malhotra voted to keep the rate unchanged, stating that the central bank requires greater clarity on the inflation trajectory before considering any recalibration.

While the bank revised its FY27 GDP growth projection upward to 6.7%, policymakers expressed concern over supply-driven inflation. Retail inflation rose from 2.74% in January to 4.45% in July, driven primarily by food and fuel costs exacerbated by conflict in West Asia. Governor Malhotra noted that while current pressures do not yet warrant a monetary response to curtail demand, any evidence of these risks becoming broad-based may necessitate policy tightening.

Internal views within the rate-setting panel varied. Deputy Governor Poonam Gupta indicated that further easing is not possible and a rate hike may emerge this fiscal year. Conversely, Executive Director Indranil Bhattacharyya preferred a pause to preserve flexibility. External member Pradeep Ram Singh Rawat advocated for swift adjustments if external shocks worsen.

Market analysis provides diverging outlooks. An ICICI Bank report suggests a hawkish tilt, predicting rate hikes could begin as early as December if core CPI exceeds 4%. In contrast, SBI Research forecasts a prolonged pause through FY27, predicting that while inflation may briefly breach 6% in October and November, it will moderate to approximately 5% by the fourth quarter as monsoon conditions improve.