RBI holds repo rate at 5.25%, raises FY27 growth forecast, cuts inflation outlook

Mumbai: The Reserve Bank of India (RBI) on Wednesday kept the repo rate unchanged at 5.25% in the fourth consecutive policy review meeting, while marginally raising its FY27 growth projections and lowering the inflation forecast. RBI governor Sanjay Malhotra said there was a "need for greater clarity to emerge, especially regarding inflation, its path and composition, before taking any policy action." The six-member monetary policy committee (MPC) also retained its neutral stance, giving itself the flexibility required to respond to incoming inflation and growth data.

On regulatory changes, the governor said it would issue revised norms on interest rates charged on loans. This is expected to address the divergent market practices followed by banks, finance and housing finance companies, and others while pricing loans.

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Muted Pressures, says RBI Guv
The regulator also said it would resume issuing licences for urban cooperative banks after a pause of nearly two decades.

Malhotra said foreign currency inflows through the dedicated programmes remained robust, while ruling out the need for specific measures to absorb surplus liquidity that could be generated with foreign currency swaps.

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RBI raised its FY27 growth projection to 6.7% from 6.6%, while lowering its inflation forecast to 5% from 5.1%. Malhotra said the "overall economy has become very resilient" and that "underlying inflation pressures are muted."

He also sounded optimistic about India's ability to withstand global geopolitical uncertainty.

"Our policy frameworks are robust, institutions are strong. This is what gives us the confidence that, come what may, we will emerge stronger. There is nothing to worry about," he said.

According to Indranil Pan, chief economist at Yes Bank, the central bank would be willing to defer a rate increase for the maximum period as any preemptive hike could dent growth. Pan, in an earlier report, had said RBI could raise policy rates this fiscal year itself.

Responding to a question on the policy stance, Malhotra clarified that RBI was neither taking a 'dovish' view, nor did it believe the current policy rate was inappropriate for the outlook it had projected. He, however, cautioned that uncertainty remained high and would play out over time.

On inflation, Malhotra said price pressures had not become broadbased, even though inflation was above RBI's earlier projection.

Deputy governor Poonam Gupta said the resilience in the economy extended across sectors, particularly agriculture and the rural economy.

Addressing questions on the rupee, Malhotra said that while uncertainty remained elevated, "it is quite possible, going forward, as tensions and the conflict de-escalate, that it strengthens further."

India attracted nearly $36 billion under the 'at par' FCNR deposit swap window. This is expected to strengthen the country's external position, the governor said

The swap inflows have raised questions over whether RBI would need to absorb the rupee liquidity created when banks swap dollars with the central bank. Malhotra said the rupee liquidity arising from such dollar swaps would be "short term" and should get absorbed through the "normal needs of the economy."

The next MPC meeting is scheduled for October 5-7.