RBI Keeps Repo Rate Unchanged at 5.25%, Prioritising Inflation And Growth Over Rupee, Defence

Mumbai, June 5: The Reserve Bank of India (RBI) on Friday kept its benchmark repo rate unchanged at 5.25%, choosing to focus on inflation and growth risks despite sliding rupee. The decision was widely expected by economists and market participants.

The Monetary Policy Committee (MPC), led by Governor Sanjay Malhotra, opted against raising borrowing costs even as the rupee has weakened about 5% since February.

Malhotra said the Monetary Policy Committee observed a deterioration in the global economic environment and believed it would be prudent to await greater clarity on evolving risks before making any policy adjustments.

He added that an uncertain global environment and the possibility of a weaker-than-expected monsoon could pose downside risks to economic growth.

Oil shock complicates policy outlook

The central bank’s decision comes against the backdrop of a sharp rise in global crude oil prices. The conflict in West Asia has pushed oil prices significantly higher, increasing risks to inflation and India’s external balance. At the same time, foreign investors have pulled money out of domestic markets, adding pressure on the rupee and prompting speculation that the RBI could adopt a more hawkish stance.

However, policymakers appear to have taken comfort from relatively benign inflation readings. Retail inflation remains below the RBI’s target of 4% and well within its tolerance band of 2%-6%, giving the central bank room to avoid tightening monetary conditions despite external challenges.

Inflation Projections Raised

The central bank revised its macroeconomic projections for the current financial year, raising its inflation outlook amid persistent price pressures.

Average retail inflation is now forecast at 5.1% for the year, up from the earlier estimate of 4.6%. The RBI also increased its core inflation projection to 4.7% from 4.4%, signalling expectations of broader underlying price pressures beyond food and fuel.

Growth remains resilient

Industrial activity and business surveys have remained resilient, while domestic demand has continued to hold up despite global uncertainties. Economists note that an interest-rate hike aimed at defending the rupee could risk slowing economic momentum at a time when growth remains a policy priority.

Market participants will now closely scrutinise Governor Malhotra’s commentary for clues on the future rate trajectory, inflation risks and any additional measures aimed at attracting foreign capital or stabilising the currency. Analysts had previously suggested that the RBI could explore alternative tools, including steps to encourage dollar inflows, rather than resorting to rate hikes.

Market implications

While unchanged rates offer relief to borrowers by keeping lending costs stable, the decision underscores the RBI’s delicate balancing act between supporting growth and containing inflationary pressures from higher energy prices. Financial markets are likely to focus on the central bank’s assessment of crude oil prices, the rupee’s trajectory and inflation risks as they gauge the likelihood of policy tightening later in the year. A growing number of economists expect at least one rate increase before the end of 2026 if oil prices remain elevated and pressure on the currency persists.