Inflation Takes Centre Stage: RBI Holds Rate

Interest rates are the most effective tool used by central banks worldwide to check inflation and propel growth.

Small wonder the RBI’s monetary policy is, therefore, keenly watched among policymakers, the business community, and even individuals. 

The RBI last tweaked the benchmark interest rate, or the repo rate, in December 2025 by reducing it by 25 basis points, from 5.50% to 5.25%. Since then, it has maintained the status quo, often citing inflationary concerns and geopolitical tensions.

Several Central Banks Worldwide Raise Rates

Observing that persistent inflation has prompted several central banks to raise rates while others remain vigilant, RBI Governor Sanjay Malhotra said, "After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, the MPC [Monetary Policy Committee] voted unanimously to keep the policy repo rate under the liquidity adjustment facility [LAF] unchanged at 5.25%."

The important central banks that raised interest rates recently to neutralise the impact of the West Asia crisis on prices include the Bank of Japan, European Central Bank, Bank of Korea, and the Reserve Bank of Australia.

It’s The Interest Rates

Interest rates determine all aspects of life and businesses, literally. These directly influence investment, borrowing and saving. Although lower rates push growth, they raise inflationary expectations by making money cheaper.

On the contrary, rates are increased primarily to check inflation. Central banks worldwide try to strike a fine balance to keep prices under control without sacrificing growth.

The RBI has been mandated by the government to keep retail inflation at 4%, with a 2% margin on either side.

Taking into account various international and domestic factors, the RBI raised the growth projection for 2026-27 to 6.7% and lowered the annual inflation forecast to 5%.

As per the provisional estimates of the Ministry of Statistics and Programme Implementation (MoSPI), the Indian economy grew by 7.7% in 2025-26.

The benchmark interest rate in India is decided by the Reserve Bank's Monetary Policy Committee comprising Governor Malhotra and five other members. The MPC has three external members: Nagesh Kumar, Saugata Bhattacharya, and Ram Singh. The other two members are Poonam Gupta (Deputy Governor) and Indranil Bhattacharya (RBI Executive Director).

The growth, Malhotra said, will continue to be supported by resilient domestic demand, sustained expansion in manufacturing and services activity, and robust exports, reaffirming India’s position as the world's fastest-growing major economy.

RBI’s Inflation Peg

As regards inflation, Malhotra said, it will be primarily on account of supply-side pressures caused by food and fuel.

"It [inflation] is not getting broad-based; core inflation remains moderate and is expected to decline after peaking in Q3. Growth, albeit resilient, is expected to be lower in 2026-27," he added.

The outlook, he added, "is hazy because of the uncertainties regarding the southwest monsoon, El Niño, geopolitics, and global trade policy."

Commenting on the monetary policy decision, Crisil Chief Economist Dharmakirti Joshi said that in terms of growth-inflation mix, "there is a marginal improvement compared with the June forecast, with growth now projected to be 10 basis points higher and inflation 10 basis points lower."

"We expect growth to moderate to 6.6% from 7.7% in the previous fiscal as higher oil prices, weather-related uncertainties and a softer global environment begin to weigh on economic activity," said Joshi.

Crude Oil Prices, Southwest Monsoon

The key risks to monitor are the trajectory of crude oil prices and the progress of the southwest monsoon, he said, adding that "Global central banks also remain vigilant on inflation, with some raising interest rates and others maintaining the status quo." 

According to Vikas Garg, Head, Fixed Income, Invesco Mutual Fund, the current domestic growth and inflation dynamics do not suggest a likelihood of a rate hike at the October policy meeting.

"Overall, the policy outcome was marginally more dovish than expected, particularly on the inflation outlook and liquidity management approach. This should be supportive for bond markets and may exert downward pressure on yields, especially against the backdrop of healthy capital inflows expected over the coming months," Garg added.