India's RBI Holds Repo Rate at 5.25%, Cuts FY27 Growth Forecast on Middle East Conflict

The Reserve Bank of India (RBI) kept its benchmark repo rate unchanged at 5.25% at its June monetary policy meeting, marking the third consecutive hold and maintaining a neutral policy stance. The decision, led by Governor Sanjay Malhotra, was in line with market expectations as the conflict in the Middle East threatened to dampen GDP growth while fuelling inflationary pressures. The standing deposit facility rate was held at 5.0% and the marginal standing facility rate at 5.50%.

The RBI took a notably cautious view of the economic outlook. It lowered its GDP growth forecast for FY2026/27 to 6.6%, down from its earlier estimate of 6.9%, with quarterly growth projected at 6.6% in Q1, 6.3% in Q2, and 6.5% and 6.8% in Q3 and Q4 respectively. Simultaneously, the central bank raised its inflation projection for the year to 5.1%, up from an earlier 4.6%, driven mainly by higher LPG, base metal, plastic, and rubber prices. Inflation is forecast to peak at 5.9% in both Q3 and Q4.

Governor Malhotra explained that the West Asia conflict would adversely impact growth through higher input costs associated with rising energy prices, increased international freight and insurance costs, and supply-chain disruptions that could constrain the availability of key inputs for downstream sectors. He emphasized, however, that the fundamentals of the Indian economy are on a stronger footing, providing greater resilience to withstand shocks than in the past. He also noted that government measures targeted at supporting exports and protecting supply chains should help mitigate the conflict's adverse impact.

The rupee has come under pressure during the conflict, with India's foreign exchange reserves dropping from an all-time high of $728.5 billion in late February before stabilizing around $682 billion. The RBI has intervened in the forex market through dollar sales and unveiled a five-pronged plan to attract foreign capital and support the rupee. Real estate developers welcomed the rate hold, noting it would support housing demand and project execution despite rising cost pressures.