The Reserve Bank of India(RBI) kept its benchmark repo rate unchanged at 5.25% on Friday, cut its FY27 real GDP growth projection to 6.6% from 6.9%, and raised its full-year inflation forecast to 5.1% from 4.6%, the second successive policy meeting where growth has been marked down and inflation marked up. Governor Sanjay Malhotra announced the unanimous MPC decision on June 5, 2026, after a meeting held June 3–5. This is the third consecutive meeting at which the repo rate has been held unchanged, following a cumulative 125 basis points of cuts between February and December 2025.
Markets reacted cautiously to the policy announcement. As of 2:00 PM IST, the Nifty50 was down 91 points, or 0.39%, at 23,299, while the Sensex declined 218 points, or 0.29%, to 74,141. Rate-sensitive sectors such as PSU Banks, Financial Services and Realty outperformed, whereas Metal, IT and FMCG stocks traded lower.
Check live:
Key Policy Numbers at a Glance
| Parameter | April 2026 | June 2026 |
|---|---|---|
| Repo Rate | 5.25% | 5.25% (Unchanged) |
| FY27 GDP Growth | 6.9% | 6.6% |
| FY27 CPI Inflation | 4.6% | 5.1% |
| SDF Rate | 5.00% | 5.00% (Unchanged) |
| MSF / Bank Rate | 5.50% | 5.50% (Unchanged) |
FY27 Quarterly GDP and Inflation Forecast
| Quarter | GDP Growth | CPI Inflation |
|---|---|---|
| Q1 FY27 | 6.6% | 4.2% |
| Q2 FY27 | 6.3% | 5.1% |
| Q3 FY27 | 6.5% | 5.9% (peak) |
| Q4 FY27 | 6.8% | 5.4% |
| Full Year FY27 | 6.6% | 5.1% |
Why Did the RBI Hold Rates Despite Rising Inflation?
The MPC retained its neutral stance, which allows it to move in either direction as new data arrives. The policy statement noted that while inflation risks have risen, underlying demand-side pressures remain relatively contained, meaning this is an imported, supply-driven shock, not domestic overheating.
Hiking into a growth slowdown would be premature. Cutting into an energy-driven inflation surge would be reckless. The hold is the only defensible call until there is more clarity on how the West Asia situation resolves.
West Asia Conflict: The Central Risk
- The RBI identified the prolonged West Asia conflict as the single biggest external uncertainty, energy markets are volatile, crude inventories are declining, and global commodity prices have firmed up sharply.
- The conflict has disrupted supply chains, raised freight and insurance costs, and pushed domestic fuel prices higher.
- Petrol is up 7.4% since May. Diesel is up 8.4%.
- The MPC estimates these fuel hikes alone add approximately 36 basis points directly to headline CPI.
- Price increases have also spread to commercial LPG, chemicals, industrial raw materials, rubber and plastics, a broader input cost bleed that has not yet fully passed through to consumers.
- The RBI warned: the longer the conflict persists, the greater the impact on both inflation and growth.
Inflation: What the RBI Is Tracking
- Full-year FY27 CPI forecast: 5.1%. Peak in Q3 at 5.9%.
- Core inflation: Held steady at 3.7% through March–April 2026.
- Core inflation excluding precious metals: 2.1–2.2%, evidence that demand-side pressures are contained.
- Full-year core inflation for FY27 is projected at 4.7%.
- Governor Malhotra flagged second-round effects, higher energy costs feeding into wages and expectations, as a distinct risk that has not yet materialised.
The key read: Inflation is being driven by external supply factors, not by excess domestic demand. That distinction is what is keeping the MPC from hiking.
Inflation Risk Breakdown
| Driver | Estimated Impact | Current Status |
|---|---|---|
| Fuel price pass-through | +36 bps to headline CPI | Confirmed |
| Commercial LPG, chemicals, rubber | Broad input cost pressure | Ongoing |
| Core CPI (ex-precious metals) | 2.1–2.2% | Contained |
| Second-round wage / expectation effects | Material upside risk | Not yet triggered |
| Monsoon deficiency / El Niño | Food inflation risk | Unresolved |
Monsoon—The Domestic Risk the RBI Flagged Separately
- The RBI flagged subnormal southwest monsoon forecasts and El Niño conditions as a distinct upside risk to inflation, separate from the West Asia situation, not a secondary concern but explicitly listed alongside it in the policy statement.
- Spatial and temporal distribution of rainfall was named as a specific variable the MPC is tracking.
- A weaker monsoon could hit agricultural output, spike food inflation, and compress rural demand simultaneously, worsening both the inflation and growth outlook at once.
- Cushions in place: Adequate food grain buffer stocks, satisfactory reservoir levels, and ongoing government programmes for crop diversification and water harvesting.
Growth: Headwinds Itemised
- FY26 actual GDP growth: 7.6%, the base India is coming off.
- FY27 forecast now 6.6%, down from the 6.9% set at the April MPC just two months ago.
- Higher energy and freight costs are squeezing manufacturers.
- Weak global demand is a headwind for merchandise exports.
- Rising input costs are creating investment uncertainty even as government capex stays healthy.
- Private consumption remains resilient, the Governor noted, with stable employment and ongoing discretionary spending. Services and manufacturing PMIs continue to signal expansion.
Growth Buffers—Where India Stands
| Buffer | Current Position |
|---|---|
| FY26 actual GDP growth | 7.6% |
| FX reserves (as of May 29, 2026) | $682.3 billion (~11 months import cover) |
| Credit growth FY26 — all sources | 15.4% vs 12.1% prior year |
| Banking system capital adequacy | Healthy |
| NBFC capitalisation | Well capitalised |
| Services and manufacturing PMIs | Expansion territory |
| FPI net equity outflows YTD 2026 | Over ₹2 lakh crore, persistent pressure |
Two Moves Made Alongside the Rate Decision
That’s not the whole story. Two significant steps were taken on June 5 to address rupee pressure and foreign capital outflows.
1. Centre exempts FIIs from tax on G-Sec gains — via Ordinance
The Finance Ministry promulgated the Income-tax (Amendment) Ordinance, 2026, exempting foreign institutional investors and the Bank for International Settlements from both capital gains tax and interest income tax on investments in government securities, effective from April 1, 2026. The ordinance was published in the Gazette of India on Friday with Parliament not in session, a sign of the urgency with which policymakers are trying to reverse the foreign outflow trend from domestic debt markets.
2. RBI expands the Fully Accessible Route
The RBI widened the FAR to include new issuances of 15-year, 30-year, and 40-year government bonds, making a larger pool of sovereign debt available to overseas investors without investment limits. Investment limits for NRIs and OCIs in Indian equity markets were also enhanced, with similar benefits proposed for all individual Persons Resident Outside India.
Both steps are aimed at stabilising the rupee, which hit a record low of ₹95.86 per dollar on May 14, 2026, having depreciated more than 6% since the West Asia conflict escalated. It has since partially recovered on expectations of a US–Iran ceasefire, with crude prices falling roughly 21.8% from their May peak to around $91 per barrel, though a formal agreement remains unconfirmed and the Strait of Hormuz remains largely unresolved.
What to Watch Next
Q1 FY27 CPI data (due July 2026), early monsoon spatial coverage data, and any confirmed development in the US–Iran ceasefire situation are the three triggers that will determine whether the RBI’s 4.2% Q1 inflation assumption holds or whether the upside scenario accelerates a policy rethink at the August MPC.
Read Next: Big Supply Incoming? Hindustan Zinc Shares Falls 5% on ₹5,000 Crore Govt OFS Plan
FAQ
Q: Will the RBI hike rates if inflation stays above 5%?
The MPC retained a neutral stance specifically to keep both options open. The trigger for a hike would be second-round effects, wages or broader prices rising because of energy costs, not just the energy costs themselves. Core inflation excluding precious metals at 2.1–2.2% shows that has not happened yet.
Q: What is India’s repo rate, and when was it last changed?
5.25%, held unchanged at the June 5 MPC. The last rate change was a 25 bps cut in December 2025. Before that, the RBI cut a cumulative 125 bps between February and December 2025, bringing rates down from 6.5%.
Q: With rates on hold, what does this mean for borrowers?
No change to EMIs in the immediate term. Repo-linked loan rates remain where they are. The direction of the next move depends entirely on whether inflation, currently projected to peak at 5.9% in Q3, begins easing back toward 4% in Q4 as the RBI expects, or whether it stays elevated and forces a policy rethink.
Â
