The Reserve Bank of India (RBI) on Wednesday kept its benchmark repo rate unchanged at 5.25%, opting for caution amid growing uncertainty over the economic impact of the ongoing conflict in West Asia, rising crude oil prices and global supply disruptions.

 

The decision marks the third consecutive monetary policy review in which the central bank has maintained the status quo on interest rates, signalling its preference to closely monitor evolving inflation and growth risks before considering any further policy action.

 

Announcing the outcome of the monetary policy committee's (MPC) meeting, RBI governor Sanjay Malhotra said the six-member panel unanimously voted to retain the policy repo rate at 5.25%. "After a detailed assessment of evolving macroeconomic and financial developments, as well as the outlook, the MPC unanimously decided to keep the policy repo rate unchanged at 5.25%. Consequently, the standing deposit facility (SDF) rate will remain unchanged at 5%, while the marginal standing facility (MSF) rate and the bank rate will remain at 5.5%. The MPC also decided to continue with the neutral stance."

 

"The West Asia conflict continues to challenge the global economy by disrupting key trade routes and supply chains, amplifying market volatility and depressing business sentiment. Trade uncertainty persists as the US has imposed fresh tariffs. The global economic environment has become increasingly unstable. Global growth is projected to soften, while inflation is forecast to be higher in 2026 compared with 2025. While some central banks have tightened monetary policy, others remain vigilant. Crude oil prices, currencies and financial markets continue to remain volatile, fluctuating in line with the changing intensity and uncertainties of the West Asia conflict," the governor added.

 

According to Mr Malhotra, the Indian economy has remained resilient amidst persisting global headwinds. "High-frequency indicators available so far point towards steady domestic demand in the first quarter (Q1) of FY26-27. Private consumption remained robust. Investment continues to be resilient, as suggested by various indicators related to construction, capital goods and bank credit. External demand also sustained, as healthy expansion in services exports was complemented by a rebound in merchandise exports."

"Looking ahead, the turbulent global economic environment is likely to have some bearing on domestic economic activity. Energy prices and supply chain pressures remain elevated and uncertain. The adverse impact is being contained with various supply-side measures. Even though the situation is still evolving, deficient and uneven south-west monsoon amidst El Niño conditions poses some risks to the agriculture sector’s outlook and rural demand," he said. 

Nevertheless, RBI said the government’s initiatives pertaining to crop diversification, including short-duration and climate-resilient crops, and water harvesting and conservation, among others, are expected to mitigate the impact. 

"Furthermore, sustained momentum in services, continuing impact of GST rationalisation, and broadly stable employment conditions should continue to support urban demand. Strong capacity utilisation, robust credit flow and the government’s continued thrust on infrastructure are expected to sustain investment activity. While services exports are expected to sustain, merchandise exports will be supported by the recent trade agreements and thrust on diversification," the RBI governor said.

According to the governor, economic activity has remained resilient, with real gross domestic product (GDP) growth projected at 6.7% for FY26–27. RBI has revised upward its growth projections for the first half of FY26–27, pegging growth at 7.0% in Q1, 6.4% in the second quarter (Q2), 6.5% in the third quarter (Q3) and 6.8% in the last quarter of FY26-27. Full-year projections will be announced in April, after the release of the new GDP series later this month, RBI said.

The central bank has projected real GDP growth for Q1 of FY27-28 at 7.3%.

While CPI inflation increased to 4.4% in June 2026 after remaining below the target for 16 consecutive months, RBI said it turned out to be lower by 30bps (basis points) than what was earlier projected for Q1FY26-27. "The increase in June was primarily due to higher food and fuel inflation. The increase in food inflation was broad-based, with most constituents witnessing price pressures during May-June. Fuel inflation also rose, driven by a revision in retail prices, following the sharp spike in international energy prices. It also led to higher inflation in select categories such as restaurant charges. Despite the pressure from higher input costs, core (CPI excluding food and fuel) inflation remained unchanged at 3.9% during May-June. Excluding precious metals, core inflation remained even lower at 2.3%-2.5% during this period."

Going forward, RBI said the El Niño’s impact on temporal and spatial rainfall distribution remains a risk, although proactive supply management and adequate foodgrain stocks could provide buffers. Global oil prices have remained volatile with sharp two-way movements triggered by geopolitical developments, blurring the near-term outlook. Although generalised inflation pressures continue to remain modest so far, the risks of higher food, fuel and other input prices translating into a broad-based increase in inflation persist, it added.

RBI projected CPI inflation at 5.0% for FY26-27 with Q2 at 4.7%, Q3 at 5.9% and Q4 at 5.5%. Inflation for Q1FY27-28 is projected at 5.3%. 

Core inflation is projected at 4.3% for 2026-27. "Core inflation, excluding precious metals, is expected to be lower in the near term, suggesting that demand pressures remain contained," RBI said.

 

Additional Measures

1. Resuming Licensing of UCBs on 'On Tap' Basis
Apart from monetary policy decisions, the RBI governor also announced a series of additional measures to strengthen the cooperative banking sector and enhance consumer protection in lending. RBI will issue draft guidelines to resume the licensing of urban cooperative banks (UCBs), based on feedback received on its discussion paper. 

"A discussion paper on Licensing of UCBs was published for stakeholder feedback on 13 January 2026, following a two-decade pause on issuance of fresh licenses. On an analysis of the feedback, it has been decided to resume licensing of UCBs on an 'on tap' basis. The draft guidelines will be issued shortly for stakeholder consultation," the central bank said.

2. Guidelines on Concentration Risk Management for RCBs
Prudential norms on concentration risk management of rural cooperative banks (RCBs) are governed by the credit monitoring arrangement (CMA) instructions issued in 2008. 

It will also release draft directions after undertaking a comprehensive review of the credit monitoring arrangement for RCBs, marking the first such overhaul since the framework was last revised in 2008. 

3. Guidelines on Interest Rates on Advances for REs
In another significant move, RBI proposed to harmonise and standardise the regulatory framework governing interest rates on advances across all regulated entities (REs). 

RBI's proposed rationalisation aims to harmonise the guidelines across REs while maintaining proportionality, address certain operational aspects of the current framework on the marginal cost of funds-based lending rate (MCLR) and external benchmark lending rate (EBLR) and standardise certain divergent market practices concerning interest charging, including the day-count convention and benchmark reset dates. 

The measure aims to improve transparency in lending practices and strengthen consumer protection by ensuring greater consistency in how lending rates are determined and disclosed, the central bank said.