RBI Maintains Repo Rate Amid Global Financial Rally

Overview of RBI’s Recent Decision

MUMBAI: In a significant move following the US’s announcement to pause hostilities in West Asia—which ignited a global rally in financial markets—the Reserve Bank of India (RBI) Monetary Policy Committee has unanimously decided to maintain the policy rate at 5.25%. This marks the second consecutive meeting with unchanged rates. RBI Governor Sanjay Malhotra expressed cautious optimism about sustaining lower rates for an extended period.

Economic Concerns and Risks

The governor highlighted several areas of concern impacting the economic outlook:

• Rising Crude Oil Prices: Elevated prices may increase imported inflation and exacerbate the current account deficit.
• Market Disruptions: Challenges in energy, fertilizer, and other commodity markets could adversely affect industry, agriculture, and services, leading to decreased domestic output.
• Increased Risk Aversion: Heightened uncertainty could impact domestic liquidity, economic activity, consumption, and investment.

Additionally, external demand may weaken, leading to slower remittances and tighter financial conditions.

Optimism on Oil Prices and Forex Measures

The RBI’s optimism is reflected in its oil price assumption of an average of $85 per barrel for the year, indicating expectations for potential normalization or a sharp price decline. Governor Malhotra reassured markets that the forex measures limiting banks’ open positions were not structural but designed to prevent "excessive speculation" from escalating. He emphasized, "We remain committed to deepening and internationalizing the market," assuring that these measures would be temporary and reviewed as conditions improve.

Easing Capital Norms for Banks

In a dovish policy stance, the RBI has decided to ease capital norms and reserve requirements for banks. The removal of the Investment Fluctuation Reserve requirement, along with the easing of Capital to Risk-Weighted Assets Ratio computation norms, is expected to strengthen banks’ capital positions and support sustained credit growth, according to SBI Chairman CS Setty.

GDP Growth and Inflation Forecasts

The RBI forecasts a GDP growth rate of 6.9% for the year, with quarterly estimates as follows:

• Q1: 6.8%
• Q2: 6.7%
• Q3: 7.0%
• Q4: 7.2%

Conversely, inflation is anticipated to rise, with the Consumer Price Index (CPI) expected at 4.6% for the year:

• Q1: 4.0%
• Q2: 4.4%
• Q3: 5.2%
• Q4: 4.7%

According to Madan Sabnavis, Chief Economist at Bank of Baroda, these projections suggest limited chances for further rate cuts, especially with El Niño posing risks to inflation.

Global Trends Impacting India

On a global scale, the RBI’s outlook remains cautious. Trade growth is projected to slow in 2026 compared to 2025, hampered by tariff-related uncertainties, the West Asia conflict, and elevated energy prices. India is currently witnessing a contraction in merchandise exports and a surge in imports, widening the trade deficit. Although services exports and remittances may mitigate some impacts, rising energy prices and global uncertainties present significant risks.

Despite these challenges, Governor Malhotra noted that India appears more resilient than in past crises and stronger compared to some peers.