RBI holds repo rate at 5.25%, unveils steps to support rupee

India had entered the latest episode of global turbulence with stronger macroeconomic fundamentals than in previous crises, but warned that escalating geopolitical tensions, elevated commodity prices were clouding economic outlook - RBI Governor Sanjay Malhotra

The Reserve Bank of India (RBI) on Friday kept its benchmark repo rate unchanged at 5.25 per cent, as expected, and announced a raft of measures to attract foreign capital and support the rupee amid growing risks to growth and inflation from the prolonged West Asia conflict, elevated energy prices and global supply-chain disruptions.

To support the rupee, the measures included scrapping taxes on interest income and capital gains for eligible foreign investors in Government securities, offering concessional terms for foreign-currency deposits from non-resident Indians and subsidising hedging costs for select offshore borrowings.

The Monetary Policy Committee (MPC) unanimously voted to leave the policy repo rate unchanged at 5.25 per cent, and continue with its “neutral” stance.

RBI Governor Sanjay Malhotra said its 4 per cent medium-term inflation target is sacrosanct and has not been put in abeyance.

India had entered the latest episode of global turbulence with stronger macroeconomic fundamentals than in previous crises, but warned that escalating geopolitical tensions, elevated commodity prices and supply disruptions were clouding the economic outlook.

“The committee noted that the global environment has deteriorated,” he said announcing the policy decision. The panel felt it would be “prudent” to wait for greater clarity to emerge, he added.

The Central Bank said underlying inflation pressures remain subdued, but cautioned that rising costs could spill over into wages and inflation expectations.

It also cited risks from a below-normal monsoon forecast and possible El Nino conditions, which could put pressure on food prices in the months ahead.

RBI lowered its growth expectations for the current fiscal year, projecting real GDP growth at 6.6 per cent in 2026-27, below the 6.9 per cent April forecast. The projection is also lower than 7.6 per cent estimated for 2025-26.

It forecast inflation to rise to 5.1 per cent in 2026-27, with price pressures expected to peak at 5.9 per cent in the third quarter before easing. This compares to the previous projection of 4.6 per cent average retail inflation for the year.

Core inflation is expected at 4.7 per cent, up from earlier projection of 4.4 per cent.

While headline inflation remains below the RBI’s 4 per cent target with a tolerance band of 2-6 per cent, MPC cautioned that higher global energy prices and supply shocks could trigger broader second-round effects on wages and inflation expectations.

“The MPC felt it would be prudent to wait for greater clarity to emerge,” the Governor said, adding that the central bank would remain data-dependent and closely monitor inflation risks.

The RBI said domestic demand remained resilient, supported by consumption, investment and continued expansion in manufacturing and services.

However, high energy costs, weaker global demand and a forecast of below-normal monsoon rainfall pose risks to growth.

The Government said it would scrap taxes on interest income and capital gains for eligible foreign investors in Government securities from April 1, 2026, while the RBI broadened the universe of sovereign bonds available under its unrestricted foreign investment route.

The central bank also announced concessional forex swaps for state-run firms raising overseas debt and said it would bear hedging costs on fresh three-to five-year FCNR(B) deposits until September 30 to attract dollar inflows from non-resident Indians.

Together, the measures are aimed at shoring up the rupee, which has plunged over 6 per cent this year on war-driven surge in crude prices and record foreign fund outflows.

India’s foreign exchange reserves stood at USD 682.3 billion as of May 29, providing an import cover of about 11 months, the RBI said.

The governor reiterated that the central bank does not target any specific exchange-rate level and would intervene only to curb excessive volatility and prevent disorderly market conditions.