The Reserve Bank of India (RBI) Governor Sanjay Malhotra-led Monetary Policy Committee (MPC) is set to announce its monetary policy decision at 10:00 AM today. The MPC is widely expected to keep the repo rate unchanged at 5.25%, pausing amid the ongoing US-Iran conflict and its potential impact on India's economic growth. The six-member committee concluded its three-day meeting on Wednesday.
Economic Challenges Persist
According to a report by Yes Bank, monetary policy challenges remain elevated despite some improvement in the geopolitical situation. Underlying risks have not fully dissipated, and the economy continues to face the possibility of supply-side disruptions. The report noted that wholesale price pressures are gradually feeding into consumer inflation, reflected in higher retail prices of petrol and diesel, as well as increases in commercial LPG rates. It further highlighted a sharp rise in manufacturing and agricultural input costs, with several producers indicating their intention to pass on these higher expenses to consumers.
"Although all policy options remain open, we believe the likelihood of a rate change or shift in policy stance in June is limited, as the RBI may prefer to wait and evaluate the secondary effects of rising prices," the Yes Bank report said.
Retail Inflation in Focus
The RBI uses the Consumer Price Index (CPI) as the primary measure while formulating monetary policy. The government has mandated a CPI-based inflation target of 4%, with an upper tolerance limit of 6% and a lower threshold of 2%. Retail inflation edged up to 3.48% in April, largely driven by higher prices of gold and silver jewellery along with certain food items.
Cumulative Rate Cuts and Potential Hike Cycle
The RBI has already lowered policy rates by a cumulative 100 basis points during 2025-26, with total easing of 1.25% since February 2025. However, economists now expect a rate hike cycle to begin in the later half of FY 2026-27 if the US-Iran conflict persists and El Nino disrupts agricultural prospects.
Market and Industry Expectations
State Bank of India Chairman C S Setty said economic growth could stabilise if the RBI maintains current policy rates despite prevailing inflation concerns. He added that market expectations are largely aligned towards a pause. Shishir Baijal, International Partner, Chairman and Managing Director of Knight Frank India, also expects the MPC to keep rates unchanged. According to Baijal, a stable interest-rate environment remains crucial for the real estate sector, where housing affordability and homebuyer sentiment are closely influenced by borrowing costs. Maintaining rate stability would help support residential demand, sustain sales momentum, and encourage investment across the wider property market.
Survey Indicates Rate Pause
According to a PTI survey of economists and treasury heads, the RBI is expected to leave the repo rate untouched in the current review. However, a majority believe the central bank could return to a tightening cycle later in FY27 as inflationary pressures build. Among those surveyed, 11 expect no change in rates, while four anticipate a 25-basis-point increase. Most respondents foresee at least two rate hikes during the current fiscal year, with some suggesting more if inflation risks become pronounced.
MPC Composition
Apart from Governor Sanjay Malhotra, the MPC comprises Nagesh Kumar (Director and Chief Executive of ISID), economist Saugata Bhattacharya, Ram Singh (Director of the Delhi School of Economics), RBI Deputy Governor Poonam Gupta, and RBI Executive Director Indranil Bhattacharyya. At its April policy review, the RBI chose to leave benchmark interest rates unchanged, adopting a cautious approach as policymakers evaluated the potential impact of the West Asia conflict on inflation, economic growth, and energy supplies.
Later today, GDP data for the fourth quarter of financial year 2025-26 will also be released along with full-year growth estimates. GDP growth is expected to have moderated in the fourth quarter. However, economists and market experts are more worried about the impact of the US-Iran conflict on growth and inflation in current and subsequent quarters.
