ICRA expects RBI to keep repo rate unchanged in August MPC decision; Here's why

The Reserve Bank's Monetary Policy Committee (MPC) is expected to keep the benchmark repo rate unchanged at its August monetary policy review despite retail inflation breaching the 4% mark in June, according to rating agency ICRA.

ICRA observed that the recent decline in crude oil prices has lowered the probability of an early rate increase by the RBI.

“The material easing in crude oil prices has reduced the likelihood of a rate hike in August 2026, even as the renewal of tensions in West Asia, uncertainty around monsoon turnout and any potential generalisation of inflationary pressures warrant some caution,” the agency noted.

It said any policy rate hike, if required, is likely to be back-ended in the current financial year and would depend on whether inflationary pressures become more entrenched.

The government has mandated the Reserve Bank of India to ensure that the headline inflation remains at 4%, with a margin of 2% on either side.

According to ICRA, the June inflation print was slightly higher than its estimate of 4.3% and reflected the impact of rising food prices, higher transport costs after increases in petrol and diesel prices, and higher prices in restaurants and accommodation services due to costlier cooking fuel.

The agency expects inflationary pressures to persist in the near term, projecting headline CPI inflation at around 4.6% in July.

“While prices of gold and silver have eased in MoM terms in the ongoing month, other nonfood components may exert pressure on the July CPI print, amid the continued passthrough of higher fuel prices,” it said.

ICRA said food and beverages inflation rose to 5.1% in June from 4.5% in May, with nine out of ten food sub-groups recording higher inflation.

Edible oils and fats, fruits and nuts, vegetables and pulses, milk and dairy products, cereals, meat, fish and ready-made food all witnessed higher price increases during the month.

The agency said dairy and poultry products, cereals and vegetables together accounted for nearly two-thirds of the increase in food inflation between May and June.

Transport inflation more than doubled to 4.3% in June from 1.8% in May, reflecting the full impact of higher retail prices of petrol and diesel.

Restaurants and accommodation services inflation also accelerated to 6.9% from 5.7%, partly due to higher cooking fuel costs.

The rating agency said early trends indicate inflation could remain elevated in July as retail prices of a majority of food items continued to firm up in the first half of the month.

It pointed to sharp increases in prices of onions, edible oils, pulses and rice, while noting that fuel costs could continue to exert pressure on non-food inflation.

On the monsoon, ICRA said rainfall improved considerably in early July, narrowing the seasonal rainfall deficit and providing support for kharif sowing.

However, it said rainfall during July and August would remain critical for agricultural output and food prices, noting that kharif sowing was still running 16% below last year's level as of July 10.