The Reserve Bank of India (RBI) decided to keep its benchmark repo rate unchanged at 5.25% during its August 5, 2026, Monetary Policy Committee (MPC) meeting. This decision was unanimous and reflected a cautious approach amid global geopolitical uncertainties, despite India's domestic economy showing resilience. The RBI also maintained a 'Neutral' policy stance, indicating that future actions will be data-dependent, balancing inflation control with economic growth. This decision led traders to dial back their bets on an October rate hike, with expectations for rate hikes over the next 12 months in interest-rate swap markets now pricing in roughly 75 basis points.
The central bank's decision to hold rates comes even as many global peers have begun raising rates. While retail inflation rose to 4.38% in June, exceeding the RBI's 4% target for the first time in 17 months, it remained within the 2%-6% tolerance band. Core inflation, excluding volatile food and fuel prices, also stayed near 4%. The RBI cited elevated global uncertainties, particularly Middle East geopolitical tensions, as a key reason for its continued policy stance. Additionally, the RBI upgraded its FY27 GDP growth outlook to 6.7% while lowering its inflation forecast, reinforcing confidence in the country's economic fundamentals.
The RBI had previously implemented measures such as scrapping capital gains tax for foreign holders of Indian government bonds and sweetening dollar deposit schemes for non-resident Indians, attracting nearly $40 billion in inflows. These measures, combined with a large cash surplus expected for banks, are contributing to a steepening of the India yield curve. The gap between 30-year and five-year yields widened to over 100 basis points following the RBI's June 5 measures. Short-dated bonds are expected to outperform long-duration debt as the central bank is projected to keep interest rates on hold, suggesting a preference for shorter-term instruments.
