The Reserve Bank of India’s measures shielding banks from exchange risks have led to an FCNR (B) deposit influx | Photo Credit: FRANCIS MASCARENHAS

The Monetary Policy Committee’s decision to leave the policy repo rate and stance unchanged is unlikely to have surprised anyone. Events since the June meeting have weakened the case to embark on a new rate hiking cycle right away. Despite the continuing Iran standoff, global crude oil prices have cooled off from their peaks above $100, although they continue to be volatile, as in July.

India has navigated the crisis caused by the closure of the Strait of Hormuz creditably — without rationing or panic-buying episodes. Graded fuel and gas price hikes have not triggered any disorderly spike in inflation readings. Consumer Price Index (CPI) inflation, which crept up from 3.48 per cent in April to 4.38 per cent in June, has remained within the RBI’s 2-6 per cent band. Nor are there any signs that higher energy costs are impacting prices outside the food and fuel complex. Core inflation in May-June has been quite tame at 2.3-2.4 per cent, excluding gold prices. On the monsoon front, after a deficit of 35 per cent in all-India rainfall in June, a normal July has narrowed the deficit to 13 per cent, leading to a catch-up in kharif acreage. Growth impulses remain strong, with industry and services indicators growing at a brisk pace in the last two months.

The rupee, often the unstated factor behind policy actions, has been better-behaved too. The Reserve Bank of India’s measures shielding banks from exchange risks have led to an FCNR (B) deposit influx of nearly $40 billion so far. Foreign Direct Investment (FDI) flows, which led to a tight balance of payments situation at the end of the previous fiscal, have expanded by 15 per cent at the gross level and over 60 per cent at the net level in April-June 2026. So far this fiscal, foreign portfolio inflows in debt have more than made up for outflows on equities. These factors seem to have prompted the RBI to revise its FY27 GDP growth projections upwards to 6.7 per cent, from 6.6 per cent in June. The inflation forecast has been trimmed to 5 per cent from 5.1 per cent, with the Q2 estimate sharply cut from 5.1 per cent to 4.7 per cent.

Yet, the future is not without uncertainty. In that context, Governor Sanjay Malhotra’s statement struck a rather sanguine note on growth and inflation prospects. With the Iran situation in a limbo, upside risks to inflation remain. Foreign portfolio flows should be seen as a fickle source of dollar inflows. A mere hint by the Federal Reserve that it is relooking at rate hikes, a spike in US treasury yields or global risk-off sentiment due to ongoing AI unwind trade, could dent portfolio inflows that have been shoring up the rupee. With El Nino still in the air and kharif sowing only halfway through, there’s scope for surprise spirals in food prices, too. One hopes that RBI’s optimism is no more than skin-deep — aimed at shoring up sentiment. Its vigil must remain keen as ever, as far as the economy and financial stability are concerned.

Published on August 5, 2026