RBI Expected to Pause as Inflation Stays Moderate

Key Moments

RBI Policy Outlook and Growth Backdrop

Commerzbank’s Charlie Lay and Moses Lim anticipate that the Reserve Bank of India (RBI) will keep its policy repo rate unchanged at 5.25%, citing contained inflation within the central bank’s 2-6% target corridor and economic growth holding above 7.4%. They judge that real interest rates remain above neutral, suggesting limited urgency for policy easing.

The analysts expect the central bank to remain in a holding pattern for now, with any potential rate reduction only being considered in 2026 and closely tied to the behavior of the Indian Rupee. According to their assessment, the RBI is likely to prioritize financial stability and guard against undue pressure on the currency.

Inflation Dynamics and RBI Projections

The inflation backdrop is described as benign. As they note,

“RBI is expected to leave the policy rate unchanged at 5.25% in the near-term as inflation is contained.”

Price pressures are currently situated at the lower end of the RBI’s 2-6% target band. The analysts highlight that,

“Inflation is at the lower end of RBI’s 2-6% target range. It is expected to climb towards 4% in the second half of this year. RBI is projecting just 2.1% for the current fiscal year and will release the new projections soon, based on the new series.”

The inflation outlook beyond the current fiscal year is also seen as moderate, with the expectation that,

“Inflation is expected to remain modest at around 4% for the next fiscal year.”

Monetary Policy Stance and Forward Guidance

The RBI has already signaled a cautious approach in its recent decision-making. The report recalls that,

“On monetary policy, RBI voted unanimously to leave the policy repo rate unchanged at 5.25% in early February. RBI is in a wait-and-see mode given modest inflation, still supportive growth, and the lingering uncertainties on the trade front. We expect them to leave rates on hold for the foreseeable future and to preserve their ammunition for unexpected shocks.”

Looking further ahead, the analysts do not rule out additional easing, but stress that any future move will depend heavily on currency conditions:

“As such, another rate cut is possible in 2026, but it will be sensitive to INR’s stability. RBI may want to avoid further pressure on INR.”

FX Outlook: USD/INR Consolidation Expected

On the foreign exchange front, Lay and Lim foresee a relatively stable near-term trading range for the Indian Rupee against the U.S. Dollar. They state,

“We look for consolidation in USD-INR near term, between the 89-91 range. INR is down 1.2% vs USD year-to-date, and it fell 4.8% vs USD in 2025.”

The analysis underscores a central bank inclined to stay on hold, supported by modest inflation and solid growth, while keeping a close watch on trade-related risks and the trajectory of the Indian Rupee.