RBI Maintains Rate, Stance; Inflation Projection Tempers Hope of Future Rate Cuts

In a first status quo for Governor Sanjay Malhotra, the Reserve Bank of India’s Monetary Policy Committee today maintained its repo rate at 5.50% and stance as neutral.  Although this decision was broadly expected, the RBI's latest inflation projections hinted that the policy has extremely high bar for more rate cuts.

The central bank projected inflation at 4.9% for April-June 2026, marking the highest forecast in six quarters, mainly attributed to adverse base effects and the cumulative demand impact of earlier policy easing measures. 

With June inflation at 2.1.%, there was some hope of RBI cutting rate next time in October, if not today. But with the inflation projections moving closer to 5%, these expectations are likely to be tempered.

A 5% inflation would mean real interest rate at 0.5%, possibly tying up the hands of the MPC. 

The RBI on its part had reduced the repo rate by 100 basis points in 2025, including a 50-basis-point cut in June. These cuts have not significantly spurred credit growth that has been hovering around 10%.

Governor Malhotra tried to look at the bright side though. Credit growth slowed to 12.1% in 2024-25 from 16.3% in the preceding year, but it still exceeds the average growth rate of 10.3% recorded over the preceding decade.

The decadal figure though may include the COVID-19 disruptions.

Acknowledging ongoing global uncertainties and trade tensions with the United States, the RBI nonetheless retained its GDP growth projection for 2025-26 at 6.5%. Additionally, it projected a 6.6% growth rate for the first quarter of next financial year, indicating expectations of a recovery following an anticipated slowdown to 6.3% in January-March 2026.

Governor Malhotra emphasised the RBI's continued flexible and agile approach toward liquidity management, aimed at ensuring sufficient liquidity to bolster economic activity and enhance policy transmission. System liquidity has notably remained abundant, averaging ₹3.0 trillion daily since the previous MPC meeting—almost double the ₹1.6 trillion surplus observed earlier. The scheduled phased reduction in the Cash Reserve Ratio from September is expected to further enhance liquidity conditions.

The surplus liquidity has facilitated effective transmission of the rate cuts introduced in 2025. Between February and June 2025, the weighted average lending rate for fresh rupee loans from scheduled commercial banks fell by 71 basis points, with 55 basis points directly attributed to the repo rate cuts. Meanwhile, the WALR for outstanding loans decreased by 39 basis points, and term deposit rates for new deposits moderated by 87 basis points. Malhotra underscored the broad-based nature of monetary transmission, indicating the rate reductions are effectively permeating across sectors.