MPC stays pat despite lowering inflation forecast by 60bps

In its recently concluded MPC meeting, the RBI decided to keep the policy repo rate unchanged at 5.5 per cent, with unanimous votes. The stance has been kept neutral to maintain policy flexibility.

Despite sharply lowering its FY26 inflation forecast by 60bps to 3.1 per cent, the reason behind leaving rates unchanged, as per Emkay, are manifold.

First, inflation was likely to cross 4 per cent in Q4, with core staying steady. Secondly, the growth outlook largely remains unchanged amid evolving global order. Thirdly, the happening of policy transmission of the last 100bps cut amid sufficient liquidity.

Moreover, pressure on rupee was one of the key reasons why markets were sceptical of further easing. The RBI Governor, Sanjay Malhotra shrugged off the recent rupee weakness by citing global volatility and massive swings in DXY in the last one year.

While a neutral stance indicates limited scope for further easing, the governor hinted that future action would be dependent on how growth performs – therefore, not closing the door on further rate cuts completely in the post policy press conference.

The MPC maintained its FY26 growth forecast at 6.5 per cent, while acknowledging downside risks arising from evolving geopolitical tensions and global trade/tariff uncertainty. However, the policy view on growth remained constructive amid demand support coming from above-normal monsoons, rural uptick, lower inflation, and improving financial conditions, along with supportive fiscal and monetary policies.

On the inflation front, the sharp moderation in forecast to 3.1 per cent is largely led by food. While the outlook is seen comfortable, concerns have been raised around the headline trajectory rising above 4 per cent by Q4F and beyond. Core CPI inflation sustaining above 4 per cent has also been mentioned, including the recent uptick in core averaging at 3.4 per cent in Q1. Analysts feel that further easing may exert pressure on the rupee ahead or impact foreign flows to India.

There was reassurance to keep banking system liquidity sufficient for smoother transmission. Notably, the existing liquidity management framework is unlikely to see any dramatic changes ahead.

Defacto given the inflation projections, the space for another 25-50 bps rate cut remains in place, although the RBI would exercise that only if there is a significant downside risk to growth – both due to domestic activity performance and the tariff impact. Only if the tariff outcome becomes decisively negative between now and forthcoming October policy, probability of a rate cut could then increase for the October policy. For now, analysts expect that the policy rate remains unchanged at 5.5 per cent for FY26.

This positioning of the RBI comes at a time when treasury yields are trending downward, putting pressure on banks’ net interest margins. While many institutions have responded by revising deposit rates downward, slice’s forward-looking treasury strategy and lean digital model have enabled it to retain higher returns for customers, reaffirming its commitment to transparent, high-earning, and accessible banking.

EoM.