RBI holds repo rate at 5.5% as inflation hits 77-month low; FY26 GDP growth forecast at 6.5% | Key takeaways

"After a detailed assessment of the evolving macroeconomic and financial developments and outlook, the MPC voted unanimously to keep the policy repo rate under the liquidity adjustment facility rate unchanged at 5.5%," RBI Governor Sanjay Malhotra said in his policy address.

Malhotra underlined the resilience of the Indian economy amid global headwinds and highlighted the scope for continued support from monetary policy, while keeping a close vigil on evolving macroeconomic conditions.

He stated that “over the medium term...the Indian economy holds bright prospects. In the changing world order, drawing on its inherent strength, robust fundamentals, and comfortable buffers, opportunities are there for the taking.”

He noted that while headline inflation has fallen to a 77-month low of 2.1% in June, this was largely driven by deflation in food prices, particularly vegetables and pulses.

“Led by improved agricultural activity and various supply side measures, food inflation recorded its first negative print since February 2019,” he said.

The inflation outlook for FY26 has become more benign than earlier projections, Malhotra said.

On the growth front, real GDP for FY26 is projected to grow at 6.5%, with rural demand remaining robust and government capital expenditure providing strong support to fixed investment. However, concerns persist around subdued industrial activity and tepid urban discretionary spending.

The MPC acknowledged that the full impact of the 100 basis points rate cut since February 2025 is still playing out in the economy. Hence, the committee preferred to wait and watch, allowing time for the transmission of past policy actions into the credit markets and consumption cycle.

Key takeaways:

• Policy repo rate remains unchanged at 5.5% as RBI opts to pause after a cumulative 100 bps cut since February 2025; monetary transmission is ongoing, and full impact yet to materialise.

• The standing deposit facility rate shall remain unchanged at 5.25% and the marginal standing facility rate and the bank rate at 5.75%.

• MPC decided to continue with a neutral stance.

• Headline inflation falls sharply to 2.1% in June, marking a 77-month low, mainly due to steep declines in vegetable and pulse prices; food inflation prints negative for the first time since Feb 2019.

• The MPC noted that the inflation outlook in the near term has become more benign than anticipated earlier, and the average CPI inflation this year is expected to remain significantly below the target.

• Inflation is projected to go up from the last quarter of this financial year.

• RBI retains FY26 GDP growth projection at 6.5%, supported by strong government capital expenditure, resilient rural consumption, and improving investment climate; however, risks remain from uneven industrial growth and global uncertainties.

• Industrial output remains weak and uneven, dragged down by electricity and mining sectors, even as the manufacturing PMI remains elevated.

• Rural economy finds support from steady monsoon and kharif sowing, replenishing reservoir levels and aiding agricultural prospects.

• Urban demand recovery slow, especially in discretionary spending, while services sector remains robust; July Services PMI hits 11-month high of 60.5.