RBI holds repo rate at 5.25% as experts highlight inflation risks, foreign capital measures, growth concerns

The Monetary Policy Committee (MPC) unanimously voted to maintain the repo rate at 5.25 percent while retaining its neutral policy stance.

The RBI also revised its FY27 inflation forecast upward to 5.1 percent and lowered its GDP growth projection to 6.6 percent amid rising geopolitical uncertainties, elevated crude oil prices and global economic volatility.

Aditya Mulki, CEO of Navi AMC, said the central bank's decision reflected a recognition that the monetary easing cycle may have ended for the time being.

“The RBI’s decision to hold the repo rate at 5.25% with a neutral stance reflects a pragmatic acknowledgement that the easing cycle has run its course for now. We have been cautious on the market over the past few months and have been calling out inflationary pressures due to the current oil crisis as well as the probability of below normal monsoons, which is also now reflected in the revised RBI's CPI guidance of 5.1%,” Mulki said.

He noted that the downward revision in growth projections acknowledged the impact of geopolitical tensions and higher fuel costs on economic activity.

“The downward revision to GDP growth from 6.9% to 6.6% for FY27 is a candid admission that geopolitical headwinds and fuel price pass-throughs are beginning to weigh on the growth outlook. Although in the long run India’s macroeconomic fundamentals, such as strong domestic consumption, sustained credit growth and government capex, remain intact,” he added.

Mulki also pointed to the RBI's measures aimed at attracting foreign capital.

“The meaningful liberalisation of foreign investment limits, extension of the Fully Accessible Route to long-duration bonds, and the concessional forex swap facility for ECBs and FCNR(B) deposits are important measures that indicate the RBI’s intent to deepen India’s capital markets and attract durable long-term foreign flows. This is a constructive medium-term positive for the Indian fixed income market.”

Economists focus on external sector, capital flows

Indranil Pan, Chief Economist at YES BANK, said the policy was largely focused on strengthening India's external sector position.

“This policy was more about addressing the paucity of foreign flows into the Indian economy and addressing the external sector problems, rather than addressing the growth-inflation dynamics,” Pan said.

He highlighted several measures designed to encourage foreign participation in Indian debt markets and improve balance-of-payments dynamics.

“The critical measures to boost FPI investments into the G-sec markets include tax measures such as withdrawal of withholding tax and the LTCG taxes. Banks are allowed to raise FCNR (B) deposits of 3–5-year maturity with RBI bearing the full hedging cost. Banks are also allowed to raise ECBs with a concessional forex swap.”

Pan estimated that the measures could generate substantial capital inflows.

“While it is difficult to exactly pin down the exact nature of inflows, USD 35-45 bn may be a decent estimate, almost enough to close the gap for the anticipated BoP for FY27.”

On monetary policy, he added, “The policy challenge is to address falling growth and rising inflation. RBI, with its pause today, has bought itself more time to understand the growth-inflation dynamics and probably did not want to immediately react with a rate hike to match its higher inflation forecasts. Having said that, all policy options remain open as the RBI assesses the risks to inflation trajectory alongside the second-round impact via inflation expectations surveys, before deciding on rate hikes.”

Bond market watches inflation and liquidity signals

Naval Kagalwala, COO and Head of Products at Shriram Wealth Ltd., said the RBI's tone remained cautious despite maintaining rates.

“The RBI MPC held the policy repo rate and its ‘neutral’ stance. The decision was unanimous. However, amid a continuing volatile global economic environment, the overall tone was cautious,” he said.

Kagalwala noted that bond yields eased after measures were announced to attract foreign capital into government securities.

“The inflation projection was raised to 5.1% (vs 4.6% in April policy) but was still seen within the RBI's comfort band - providing some respite to bond market investors, while also eliminating the need for an immediate rate hike.”

He added that the MPC continued to emphasise a data-dependent approach while maintaining confidence in domestic economic resilience and foreign exchange reserves.

Banking sector sees policy as 'measured and balanced'

George Alexander Muthoot, Managing Director of Muthoot Finance, described the decision as prudent given the prevailing global environment.

"The RBI's decision to hold the repo rate at 5.25% with a neutral stance is a prudent and well-considered one, given the current global environment. With supply-side pressures from elevated crude prices, the ongoing West Asia conflict, and potential El Niño risks weighing on inflation, preserving policy space while keeping the stance neutral reflects a measured and balanced approach to monetary management."

He added, “A stable rate environment supports business confidence and sustained credit demand, while the neutral stance appropriately keeps options open as the global situation evolves. This policy reinforces confidence in India's macroeconomic fundamentals, and we expect growth momentum and credit offtake to remain resilient in the near term."

Lakshmanan V, Group President and Head-Treasury at Federal Bank, said the policy outcome was largely in line with market expectations.

“MPC unanimously voted to keep the repo rate unchanged, and it was in line with expectations. The Growth and Inflation projections also aligned with broad market expectations.”

He highlighted measures including the expansion of the Fully Accessible Route (FAR), concessions on forex swaps and FCNR deposits, and restoration of export proceeds timelines, saying these steps were expected to support capital inflows and stabilise foreign exchange and bond markets.

RBI's foreign flow measures receive broad support

Several market participants welcomed the coordinated steps announced to attract overseas investment.

Vijay Kuppa, CEO of InCred Money, said, “The central bank’s decision to maintain a status quo was broadly in line with expectations. It’s reassuring to note that with today’s announcements, the central bank continues to exhibit its focus on the larger macroeconomic picture while continuing to remain watchful of the evolving global scenario.”

He added, “The measures announced to attract foreign flows by the central bank and the government are a good move and a step in the right direction. Given the narrower interest rate differential between the US and Indian benchmark yields, these measures may of limited help in the near term, but they do provide a much-needed boost to investor sentiment.”

Amit Modani, Senior Fund Manager and Lead-Fixed Income at Shriram AMC, described the policy as a coordinated effort to support capital inflows and financial stability.

“The Reserve Bank of India’s Monetary Policy Committee unanimously voted to maintain the benchmark repo rate at 5.25% under a ‘Neutral’ stance, adopting a data-dependent, 'wait-and-watch' approach to counter severe global headwinds and domestic risks.”

Modani said the combined fiscal and monetary measures were aimed at attracting foreign capital, supporting the rupee and addressing balance-of-payments concerns.

Analysts detect hawkish undertone

Siddhartha Sanyal, Chief Economist and Head-Research at Bandhan Bank, said the policy pause carried a hawkish message.

“The RBI delivered a somewhat hawkish pause, indicating a lower threshold for future rate hikes as inflation is expected to remain close to 6% in H2.”

He added, “The key highlight was the introduction of timely, targeted measures to attract foreign inflows, which should provide some cushion to INR going forward.”

Sanyal also noted a change in the RBI's language regarding liquidity management.

“On the liquidity front, interestingly, the Governor’s shift in language—from ensuring ‘proactive and sufficient’ liquidity to maintaining ‘appropriate’ liquidity—reinforces the overall hawkish undertone of the June monetary policy.”

Real Estate, NBFC sectors welcome stability

Mahesh Agarwal, Managing Director of Purti Realty, said stable interest rates could support housing demand.

“RBI’s decision to maintain the repo rate at 5.25% reinforces the positive momentum that the housing sector has experienced over the past year. With interest rates remaining at attractive levels and EMIs staying stable, homebuyers continue to benefit from the favourable environment for taking home purchase decisions.”

He added that policy continuity could strengthen sentiment in residential real estate markets.

Harshavardhan Neotia, Chairman of Ambuja Neotia Group, said, “The Reserve Bank of India’s policy statement suggests a period of stability despite the risks of rising inflation, slower growth, and foreign exchange vulnerability. Businesses prefer stability, and by keeping rates unchanged and taking steps to attract foreign inflows, RBI is giving businesses room to plan ahead, even within a period with global uncertainties.”

Umesh Mohanan, Executive Director and CEO of Indel Money, said the decision signalled confidence in domestic demand while acknowledging inflation-related risks.

"The RBI’s decision to keep repo rate unchanged and continue with the neutral stance signals the central bank's confidence in the growth and demand scenario of the economy while acknowledging the possible downside risk to economic growth due to the inflationary concerns due to the energy crisis, and the prospect of a weaker monsoon."

He added that stable borrowing costs and capital flow measures could support lending activity and market sentiment amid global uncertainty.