The Reserve Bank of India (RBI) has kept repo rate unchanged at 5.5%, despite inflation easing to 2.1% in June and the forecast for FY26 being revised downwards to 3.1% for FY26 from the earlier 3.7%.

The six-member monetary policy committee (MPC), led by RBI Governor Sanjay Malhotra, also weighed in the impact of US's imposition of 25% tariffs on the Indian economy.

RBI Governor Sanjay Malhotra said the committee sees “very little policy room” to support growth. The MPC had cut repo rate by 50 basis points (bps) in the previous bi-monthly monetary policy in June, which was higher than market expectations.

The MPC took the unanimous decision today to pause interest rate cuts and decided to continue with a ‘neutral’ stance. This ends MPC's three consecutive rate cuts, introduced since February to bring the repo rate down by 100 basis points to 5.5%.

The standing deposit facility (SDF) 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%

Incidentally, this is the rate-setting committee’s first policy decision after US President Donald Trump announced 25% tariffs on goods imported from India and an unspecified penalty for buying Russian oil and weapons. 

Announcing the MPC’s decision, Malhotra said on-track monsoon rains and the approaching festival season are expected to provide buoyancy to the economy while global trade challenges continue to linger.

Inflation forecast for FY26 lowered

The RBI has now pegged the inflation forecast at 3.1% for the current fiscal year, down from its earlier projection of 3.7%.

The central bank, however, expects headline inflation to rise towards the end of the year. 

"CPI inflation is likely to edge up above 4% in Q4 of 2025-26 and beyond, as unfavourable base effects, and demand side factors from policy actions come into play," Malhotra said.

As per the RBI’s quarter-wide estimates, CPI (consumer price index) inflation for Q2 is expected to be at 2.1%; Q3 at 3.1%; and Q4 at 4.4%. For the first quarter of next fiscal, retail inflation is projected at 4.9%. The risks are evenly balanced.

GDP growth forecast retained

The RBI has kept GDP growth forecast unchanged at 6.5% cent for 2025-26, with no changes across quarters.

Malhotra said domestic economic activity is supported by the above normal southwest monsoon, lower inflation, rising capacity utilisation and congenial financial conditions.

A robust government capital expenditure should boost demand. The services sector is also expected to remain buoyant.

"Despite a challenging external environment, the Indian economy is navigating a steady growth path with price stability. Monetary policy has appropriately used the policy space created by the benign inflation outlook to support growth without compromising on the primary objective of price stability," Malhotra said.

India’s real GDP growth for 2025-26 is projected at 6.5% for Q1, 6.7% for Q2, 6.6% for Q3, and 6.3% for Q4.

"Growth is robust and as per projections, though it is below our aspirations,” the RBI Governor said.