RBI keeps rates unchanged, chooses caution amid global uncertainty

Home, vehicle and gold loan borrowers are unlikely to see any change in their EMIs, while banks are also expected to maintain existing fixed deposit and savings account rates unless they choose to revise them independently.

The RBI’s decision comes against the backdrop of heightened uncertainty in global markets. The continuing conflict in West Asia has kept international crude oil prices volatile, posing inflationary risks for India, which imports the bulk of its crude oil requirements. Elevated energy prices have the potential to feed into transportation and production costs, making inflation management more challenging.

Unveiling the monetary policy, Malhotra indicated that the RBI has opted for continuity as global uncertainties continue to weigh on the economic outlook. “Financial markets remain volatile, fluctuating in line with the changing intensity and uncertainty of the West Asia conflict,” he said.

While headline inflation has moved above the RBI’s medium-term target, the rise has largely been driven by food and fuel prices rather than broad-based demand pressures.

“The MPC noted that headline inflation has edged up above target, as expected. The realised inflation for Q1, however, remained marginally lower than projections, reflecting limited power through post pressure. The higher inflation is mostly on account of fuel and food, with little signs of generalisation of price pressures so far,” Malhotra said. “It is expected to peak in Q3 of this year. Primarily again, due to food and fuel, and thereafter, moderate.”

His remarks indicate that the RBI is not inclined to either tighten or ease monetary policy until there is greater clarity on the inflation outlook. Although economic growth remains resilient, the central bank believes the balance between supporting growth and containing inflation has become more complex amid global uncertainties.

“The outlook, however, is hazy because of the uncertainties regarding south-west monsoon, El Nino, geopolitics and global trade policy. There is a need for greater clarity to emerge, especially regarding inflation, its path and composition before taking any policy action,” he said.

“Any such action (on the interest rate front) would also have to consider the need for recalibration of policy rates in line with the evolving growth-inflation dynamics, especially the normalisation of the underlying inflation from its benign levels seen hitherto,” Malhotra said.

He said the Indian economy, especially the agriculture sector, has demonstrated great resilience. “The monsoon is still evolving, with El Nino conditions developing, but it has remained resilient. Measures undertaken by the government such as distributed irrigation and raw material availability have helped,” he said.

The RBI’s cautious approach also comes at a time when major central banks are adopting a wait-and-watch stance. The US Federal Reserve also kept the federal funds target range unchanged at 3.50-3.75 per cent on July 29 amid concerns over inflation, underscoring the broader global trend of policy restraint despite slowing economic momentum.

Malhotra said supply-side disruptions triggered by the West Asia conflict had eased after June, allowing the government to withdraw temporary measures and enabling the normalisation of key input supplies. However, the renewed escalation of the conflict since early July has once again heightened uncertainty.

He said the re-escalation has amplified volatility in energy prices and revived concerns over disruptions in global supply chains, developments that could influence both inflation and growth going forward. “The MPC underscored that it will maintain a close vigil and remain resolute in its commitment to align inflation with the target,” he said.

Malhotra also flagged risks on the external sector, warning that slower global trade growth, higher energy prices and continuing uncertainty over international trade policies could widen India’s current account deficit during 2026-27.

On the exchange rate, he reiterated that the RBI would continue to allow market forces to determine the value of the rupee while stepping in to prevent excessive volatility. “There can be an argument as some people have made that it (rupee) may perhaps be undervalued in nominal or real-effective-exchange rate terms. There is a lot of uncertainty. It is quite possible that the rupee may strengthen further going forward as tensions de-escalate,” he said.