RBI MPC meets on repo rate review

 Pause repo rate and maintain stance:

Is there any other option for RBI MPC?

The third bi-monthly review meeting of the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) for the current financial year (FY 26-27) starts tomorrow.

Going through the data of the following important parameters, which get discussed in the RBI MPC meeting, and the action of some major global central banks in the last few days, makes one feel that nothing concrete emerged since then to compel the MPC to vote for a change in the repo rate/monetary stance.

1. The CPI inflation is on the rise since Dec'25 and reached a high of 4.38% in June'26. But the Q1FY206 actuals at 3.93% is much less than that was projected at 4.1% by RBI MPC. It is important to note that the committee has already projected the CPI inflation to be above the 5% in the remaining three quarters of FY 26-27.

2. The factory output growth, based on the new series of Index of Industrial Production (IIP) with base year of 2022-23, continue on the uptrend, having clocked 5.1% in May 26 and 7.3% in June 26.

3. Forex Reserves has not declined much in the last two months and at  at USD676 billion on a recent date, is adequate to cover more than nine-ten month imports. 

4. Despite West Asia war tensions unending, the crude oil prices have stabilized in the USD80-85 range and have not breached USD90 per barrel, except occasionally.

5. ₹ continues at 94-96 versus USD and there is no upward change in the decline rate of 7% since Jan 26.

6. The FPI net outflow up to June 26 is USD 34 billion, but the trend has changed in July with net inflow reported at USD 1.1 billion as a result of widening the government securities basket and tax changes  in g-sec as well for foreign investments. The new FCNR (B) scheme available up to 30th Sep 26 has already attracted USD 17 billion.  

7. Federal Reserve maintained its rate, though three out twelve have voted for an increase in the rate.

There are worrying factors of course like

 

(i) the deposit interest rates have started moving up, especially with banks not having adequate overseas presence.

(ii) the new FCNR (B), with the facility of swapping the dollar for rupee from RBI, promoting more liquidity in the financial system for onward lending 

(iii) the credit growth in the current FY outpaced deposit growth in the banking system by 500 bps so far

(iv) the household debt, on the increase, with more borrowing (including gold loans) tilted towards consumption  

(v) the price of gold, which was quoted at around Rs.7000 per gram in 2024 has more than doubled in the last two years and 

(vi) 16 states, that account for 36% of the country's geographical area, have reported deficient rainfall till now.

All the above point towards likely increase of CPI inflation more than the target level of 4% (with a band of +/-2%) in the second half of FY 26-27.

My views: Though the RBI Governor has repeatedly emphasized in his recent interview, with a leading business daily, that price stability and inflation control are the priorities, the steps initiated since the break of Iran-US war appears to be to calm down the stock markets and sustain business growth. If the yield and price movements in the benchmark G-Sec, in the last six months, is any indication, the market has already learnt to respond based on economic realities, than taking a cue from RBI MPC decision on repo rate. The same trend may follow sooner or later in bank and NBFC lending rates also, irrespective of the repo rate, if the West Asia uncertainty continues and the imported inflation/domestic deficient rainfall   start hitting the domestic supply prices.  

Though the RBI MPC has no new reason to raise the repo rate and change the policy stance now, one expects at least one rate increase either in October or December, if the present imbroglio persists. 

Regards

V. Viswanathan
CGM Retd. e-SBT

2nd August 2026