RBI held the repo rate at 5.25% and retained its neutral policy stance
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In line with expectations, the RBI held the repo rate at 5.25% and retained its neutral policy stance. The central bank raised its FY27 GDP growth forecast to 6.7% (from 6.6%) and trimmed its FY27 CPI inflation projection to 5.0% (from 5.1%), on incremental moderation in energy prices. While the downside risks to growth appear curtailed, inflation risks remain on the table in our opinion on account the ongoing pass-through of high input prices and a likely backloaded El Nino-led disruption in the monsoon season. The recent INR stability on account of the special measures announced by the RBI in Jun-26 allows time and space to the MPC to assess the incoming economic signals and take a data dependent call. We maintain our call for a 25-50 bps rate hike in H2 FY27. The rate action could be backloaded, contingent upon the uneven monsoon outturn, the fluid and volatile geopolitical environment, and a potentially higher US interest rate trajectory. This will be a shallow rate hike episode and should be seen as an act of policy normalization in the backdrop of low real policy rates. On fixed income, while we expect the 10Y g-sec yield to remain anchored in the near term around 6.75% levels, we see it drifting higher towards 7.25% by Mar-27.