RBI's rate, GDP and inflation verdicts also come with some stark warnings

The Reserve Bank of India's Monetary Policy Committee on Wednesday voted unanimously to keep the repo rate unchanged at 5.25 per cent.

While delivering the RBI rate verdicts, Governor Sanjay Malhotra also sparked a ray of hope for Indians as the central bank lifted GDP forecast for fiscal year 2027 and trimmed inflation target.

However, amid those cheers is a warning that RBI may have flagged.


"Global economic conditions and sentiments continue to remain hostage to the rapidly oscillating developments, both in scale and intensity, of the West Asia conflict," Malhotra said. He also flagged risks from fresh Trump tariffs.

Also read: RBI MPC Meeting 2026: Sanjay Malhotra & team keeps repo rate at 5.25% as global risks linger with Iran war flare-up

In another stark warning, the RBI flagged risks to India's agriculture sector which employs over 46% of the workforce in India and contributes nearly 18% to the country's GDP.


War, tariff concerns cloud global outlook

Opening his statement, Malhotra said the West Asia conflict continued to challenge the global economy by disrupting key trade routes and supply chains, amplifying market volatility and denting business sentiment.

Trade uncertainty lingered as the US imposed fresh tariffs, he said, adding that the global economic environment had become increasingly unstable, with global growth projected to soften while inflation is forecast higher in 2026 than in 2025.

The fresh US tariffs stem from Washington's new "forced labour" duties, announced in July under Section 301 of the Trade Act, which replaced an earlier temporary 10 per cent global levy.

India is among 60 economies facing the new duties, a 10 per cent rate, with USTR officials framing the move as an enforcement measure against goods made using forced labour, a justification that has already drawn legal challenges from 25 US states.

In its resolution, the MPC noted that relief from a temporary ceasefire in West Asia had dissipated quickly after the conflict resumed in July, adding to a global backdrop already marked by sharp market swings, persistent inflation concerns and shifting central bank policy stances.

The committee said several central banks had raised rates in response to inflationary pressure while others remained watchful, even as the US dollar strengthened on elevated yields, a hawkish Federal Reserve and AI-driven productivity gains in the American economy.

Global equity markets, it said, stayed volatile as investors repriced exposure to AI-linked stocks.

Malhotra noted that supply-side pressures from the West Asia conflict had actually eased somewhat since June, prompting the government to withdraw temporary measures and normalise key input supplies, including the removal of restrictions on non-domestic packed LPG in late June.

However, he said, the re-escalation of the conflict since the first week of July had amplified volatility in energy prices and renewed uncertainty about supply chains.

The Iran conflict remains a key risk to the global economy as it threatens oil supplies, shipping routes and investor confidence. Disruptions to the Strait of Hormuz, a vital route for global crude trade, triggers fears of pushing oil prices higher, stoke inflation and weigh on growth worldwide.

For India, which relies heavily on imported crude, a prolonged spike in oil prices could increase the import bill, put pressure on the rupee, lift inflation and make economic management more challenging.

Reacting to the policy, Madhavi Arora, Chief Economist at Emkay Global Financial Services, described the MPC's tone as cautious yet constructive, balancing risks from the Middle East conflict, tighter global financial conditions and El Niño against resilient domestic growth and strong FCNR+ inflows.

Also read: Count-counterpoint: MPC's external members must have the courage to dissent, disagreement drives course correction

She noted that even though Q1 inflation had come in below the RBI's own forecast, the committee had kept its focus on El Niño-related risks, while maintaining that near-term price pressures were largely supply-driven and would only prompt policy action if they broadened into second-round inflation effects.

Domestic economy holds steady despite headwinds

Despite the external headwinds, the committee assessed the Indian economy as resilient, reaffirming India's position as the world's fastest-growing major economy. Malhotra pointed to healthy Q1 corporate results in manufacturing, an expansionary PMI, and sustained momentum in services on the back of strong domestic demand.

Private consumption was driven by buoyant discretionary spending, while investment activity stayed steady on the back of robust government infrastructure spending. Merchandise exports rebounded with double-digit growth, and services exports sustained their momentum.

Agriculture: Monsoon deficit, El Niño flagged as risks

On agriculture, the MPC flagged a deficient and uneven south-west monsoon amid El Niño conditions as a key risk to the outlook. As of August 3, the cumulative monsoon deviation from normal stood at 11.9 per cent. Reservoir levels offered some comfort, with water storage across 166 major reservoirs at 44.4 per cent of capacity, though this was down from 69.3 per cent a year earlier and below the decadal average of 47.7 per cent.

Also read: RBI GDP Growth 2026-27: Malhotra & Co lift FY27 GDP forecast to 6.7% from 6.6% on growth resilience

The MPC said government initiatives on crop diversification, including a push toward short-duration and climate-resilient crop varieties, along with water harvesting and conservation measures, were expected to mitigate the impact of deficient rainfall.

Agriculture remains central to India's economy, supporting the livelihoods of nearly half the country's population and shaping rural consumption, employment and food prices.

A weak monsoon, uneven rainfall or weather-related disruptions can hurt farm output, push up food inflation and dent rural demand, making it harder for the RBI to keep inflation within its target while sustaining growth.

Inflation outlook

On prices, the MPC noted that CPI inflation rose to 4.4 per cent in June 2026, ending 16 consecutive months of readings below target, though the reading came in 30 basis points lower than the committee's own earlier projection for the quarter.

The increase was driven mainly by higher food and fuel inflation, with food price pressures broad-based across most constituents during May-June, and fuel inflation rising following a revision in retail prices after a sharp spike in international energy prices, which also pushed up costs in categories such as restaurant services.

Rationale for holding rates

Explaining its decision, the MPC said headline inflation was expected to rise further in the near term and peak in the third quarter, largely due to food and fuel prices rather than any broad-based increase, while core inflation excluding precious metals remained benign and was likely to converge with headline core inflation by the end of the financial year.

The MPC said it needed greater clarity, particularly on the path and composition of inflation, before considering any change in rates, and would also factor in the need to recalibrate policy as underlying inflation normalises from its recent benign levels.

MPC composition, next steps

The MPC, chaired by Malhotra and comprising Dr Nagesh Kumar, Saugata Bhattacharya, Prof Ram Singh, Dr Poonam Gupta and Indranil Bhattacharyya, held its 62nd meeting from August 3 to 5. The panel kept the standing deposit facility rate at 5 per cent and the marginal standing facility rate and Bank Rate at 5.5 per cent, while retaining its "neutral" policy stance.

Malhotra said the Reserve Bank would "do whatever it takes" to preserve stability of prices, the financial system and the currency, adding that the stronger macroeconomic fundamentals of the Indian economy were helping the country navigate the global shock resolutely.

The MPC said it would maintain close vigil on macroeconomic developments and remain committed to aligning inflation with its target.

The minutes of the meeting will be released on August 19, and the next MPC meeting is scheduled for October 5 to 7, 2026.