RBI keeps repo rate unchanged at 5.5%, monetary policy stance ‘neutral’
Mumbai: Reserve Bank of India expectedly left its key interest rates unchanged on Wednesday as it waited for greater clarity on the impact of US tariffs as well as playout of earlier rate cuts and recent tax reductions. RBI Governor Sanjay Malhotra, however, signalled scope for easing in the coming months to support the economy from any possible hit from US tariffs. The six-member monetary policy committee voted unanimously to keep the repurchase rate unchanged at 5.5 per cent and decided to continue with a "neutral" policy stance, giving it flexibility to move in either direction if needed in future. The rate-setting panel, headed by the central bank governor and comprising half of external experts, had cut interest rates by a total of 100 basis points this year before hitting a pause at its previous bimonthly meeting in August. Malhotra said, "It was ‘prudent’ to hold rates for the impact of policy actions to play out and greater clarity to emerge before charting the next course." "The current macroeconomic conditions and the outlook have opened up policy space for further supporting growth," he said, announcing the decisions of the MPC. "However, the MPC noted that the impact of the front-loaded monetary policy actions and the recent fiscal measures is still playing out." Also, the trade-related uncertainties are unfolding, he said, referring to the US imposing a 50 per cent tariff on imports from India as well as the tightening of H1-B visa norms.
The rupee, Asia's worst-performing currency this year, rose 0.1 per cent to 88.70 per dollar, while stocks traded higher. In holding interest rates, the RBI seems to be trying to balance competing priorities: subdued inflation and growth risks from US tariffs on one side, and the rupee's slide on the other. Malhotra said the growth outlook remains resilient, supported by domestic drivers, despite weak external demand. "It is likely to get further support from a favourable monsoon, lower inflation, monetary easing and the salubrious impact of recent GST reforms." Growth continues to be below aspirations. The central bank raised its growth forecast for the fiscal year ending March 2026 to 6.8 per cent from 6.5 per cent, but the Governor said the forward-looking projections for Q3 (October-December) and beyond are expected to be slightly lower than projected earlier, primarily due to trade-related headwinds, despite being partially offset by the impetus provided by the rationalisation of GST rates. India's GDP had expanded 7.8 per cent in the three months to June - the quickest pace in over a year. RBI also lowered its inflation projection for the year to 2.6 per cent - well below the tolerance limit of 4 per cent. It had previously projected inflation to be around 3.1 per cent in fiscal. The outlook on inflation has turned more benign due to lower food prices and goods and services tax (GST) cuts, he said. Consumer price inflation came in at 2.07 per cent in August. Malhotra also announced measures to boost credit growth amidst easing foreign exchange rules, infra financing, new universal bank licensing draft, internationalisation of rupee, easing limits for lending against shares and other financial instruments.
Overall, the policy had a strong tilt to support growth via other measures while noting that rate cuts will happen down the road. The MPC kept its policy stance neutral, although two external members - Nagesh Kumar and Ram Singh - saw reason to shift to an accommodative stance.bUpasna Bhardwaj, Chief Economist, Kotak Mahindra Bank, said in line with expectations, the MPC has delivered a dovish pause across rates and stance. "The growth risks from tariff uncertainties have created room for additional rate cuts if risks materialise. We see scope for 25-50 bps rate cuts in the rest of FY26."
