Reserve Bank of India Holds Key Interest Rate at 5.5%
The Reserve Bank of India’s Monetary Policy Committee (MPC) unanimously decided to keep the repo rate unchanged at 5.5%, pausing after three consecutive rate cuts. The decision was influenced by concerns over tariff uncertainties. Governor Sanjay Malhotra announced that the central bank has retained its GDP growth forecast for FY26 at 6.5% while lowering the current year's inflation projection from 3.7% to 3.1%. The move aims to balance economic growth with inflation, which has remained below 4% since February.
Unpacked:
The RBI paused rate cuts mainly due to uncertainties around global trade tariffs, especially new US tariffs that could affect India’s growth and financial stability. The central bank opted for caution to balance domestic growth with potential external shocks, even as inflation remains below its 4% target.
US tariffs, particularly the recent 25% increase, may negatively impact India’s GDP by 20–30 basis points. They heighten risks such as reduced external demand, volatility in capital flows, and pressure on exports, prompting the RBI to adopt a cautious monetary policy stance.
Earlier in 2025, the RBI’s policy stance was ‘accommodative’ as it cut rates to support growth. In June, the stance shifted to ‘neutral’—reflecting a more balanced approach to both supporting growth and controlling inflation amid external uncertainties.
The 6.5% GDP growth forecast is supported by strong domestic demand, recovery in investment, and resilient services. However, global risks like trade tensions and tariff uncertainties remain key factors that could affect this outlook.