RBI Holds Rates at 5.25% as Iran Crisis Keeps Inflation Risks High

The Reserve Bank of India's monetary policy committee voted unanimously to keep the repo rate at 5.25 percent Wednesday, extending a pause to a fourth consecutive meeting as renewed U.S.-Iran tensions over the Strait of Hormuz cloud the inflation and currency outlook.

"Although core and underlying inflation have risen modestly, they remain within the RBI's comfort zone. Consequently, a rate hike is unlikely in 2026 unless core inflation sustains above 4.5 per cent," Samiran Chakraborty, chief India economist at Citi, said.

The decision, announced at 10 a.m. Mumbai time, keeps the central bank's neutral stance intact even as global peers lean hawkish. The U.S. Federal Reserve held its benchmark in the 3.5 percent-3.75 percent range on July 29 in a split 9-3 decision, with three regional presidents voting for a hike. The Bank of England kept its rate at 3.75 percent for a fifth straight meeting, while the Bank of Japan left its policy rate at 1 percent on July 31.

The hold leaves the RBI out of step with a tightening bias building across developed-market central banks, but policymakers have room to wait. Headline retail inflation averaged 3.9 percent in the June quarter, below the RBI's 4.2 percent projection, even as wholesale prices rose 9.3 percent. The next policy decision in October will test whether the central bank can hold the line if crude prices keep climbing.

Inflation Undershoots, But Wholesale Pressures Build

June retail inflation rose to 4.38 percent from 3.93 percent in May, breaching the RBI's 4 percent target for the first time in 17 months. The central bank in June raised its FY27 inflation forecast to 5.1 percent from 4.6 percent and cut its GDP growth projection to 6.6 percent from 6.9 percent.

Wholesale price inflation averaged 9.3 percent over the June quarter, pointing to rising input-cost pressure. Manufacturers have said they plan to pass on higher costs to consumers, while kharif sowing remains below last year's level, raising concerns over food inflation in the coming months. "A confluence of risks is making it difficult for a clear view to emerge," a YES Bank report said, citing volatile global commodity prices, the West Asia situation and a hawkish turn by several global central banks.

Growth signals have also turned mixed. High-frequency indicators point to resilient activity, supported by industrial and services output and fuel demand, but survey-based gauges including the manufacturing PMI and the RBI's consumer confidence index have weakened, suggesting demand could soften in the months ahead.

Swap Window Draws $40 Billion as Rupee Steadies

The RBI has mobilized $40.1 billion under its special swap windows as of July 31, up from $20 billion in mid-July, with around 90 percent of inflows coming through the FCNR(B) deposit scheme. DBS Bank estimates total inflows could eventually reach $65 billion-$70 billion as compliance issues and tax-related clarity emerge in some jurisdictions.

Despite the scale of inflows, foreign exchange reserves have risen by only about $12 billion so far, which economists attribute to settlement lags and RBI intervention in the foreign exchange market. The rupee opened at 94.92 per dollar Wednesday against Tuesday's close of 95.38, its strongest level in nearly a month, though the currency remains down more than 6 percent this year.

Twelve of 13 economists surveyed by The Wall Street Journal expected the RBI to stand pat in August, while one forecast a 25-basis-point increase. HSBC expects 25-basis-point rate hikes in both October and December, taking the repo rate to 5.75 percent by the end of the year as inflation is forecast to remain above 5 percent from October. The last time the RBI held rates through a comparable stretch of geopolitical stress, it moved within months once inflation prints firmed, a pattern markets will watch closely into the October review.

This article is for informational purposes only and does not constitute investment advice.