RBI Expected to Maintain Repo Rate at 5.25% Amid Regional Tensions and Inflation Concerns

Reserve Bank Expected to Maintain Key Policy Rate Amid Global Uncertainties

The Reserve Bank of India (RBI) is likely to leave its key policy rate unchanged at 5.25 per cent this week, as its Monetary Policy Committee (MPC) assesses the potential impact of West Asia turmoil on inflation and growth trajectory.

The MPC, headed by RBI Governor Sanjay Malhotra, will announce its decision on June 5, following three days of deliberations. Experts expect the RBI to adopt a cautious stance, taking into account the rising energy prices, supply chain woes, and a depreciating rupee, primarily driven by external challenges.

A research report from the State Bank of India's (SBI) economic research department expects the RBI to maintain the status quo in June policy against a volatile backdrop. The report forecasts that the consumer price index (CPI) trajectory may indicate more than 5 per cent inflation for the next three quarters, with the current quarter expected to be between 4 to 4.1 per cent.

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The report also expects Q4 FY26 real GDP growth closer to 7.2 per cent and FY26 GDP growth at 7.5 per cent. Madan Sabnavis, Chief Economist at Bank of Baroda, echoes similar sentiments, expecting no change in the repo rate or stance next week, while Madan Sabnavis also does not expect any specific foreign exchange measures.

RBI's annual report released on Friday highlights its commitment to reviewing and improving GDP growth and inflation forecasting during the current financial year. The report states that the outlook for the Indian economy in 2026-27 remains positive, supported by strong macroeconomic fundamentals, although a prolonged West Asia conflict may pose downside risk.

Aditi Nayar, Chief Economist, ICRA, opines that the MPC will remain cautious and maintain rates and stance unchanged, citing the India Meteorological Department's (IMD) forecast of below-normal monsoon seasonal rainfall over India. The IMD states that the southwest monsoon seasonal (June-September) rainfall is expected to be 90 per cent of the long-period average with a model error of 4 per cent.

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Vinay Pai, MD and Head of Fixed Income, Equirus Capital, suggests that market expectations currently price in a potential 25-50 basis point rate hike, although recent RBI actions suggest a preference for liquidity management and currency stabilisation over immediate tightening. Pai further adds that a rate hike remains contingent on sustained macro stress, and if crude prices remain above USD 100 per barrel for an extended period, inflationary pressures could force the central bank to consider a cumulative 50 bps hike by August.

The government has set the consumer price index (CPI) based headline inflation target at 4 per cent with the upper tolerance level of 6 per cent and the lower tolerance level of 2 per cent for the central bank.