RBI lowers growth forecast, fear of inflation and weak monsoon amidst unchanged repo rate
The Reserve Bank of India (RBI) has kept the repo rate unchanged at 5.25% following its Monetary Policy Committee (MPC) meeting, ensuring stability in borrowing costs and EMI payments. RBI Governor Sanjay announced the interest rate decision on June 5.
The RBI has revised its economic projections. The forecast for the fiscal year 2026-27 has been adjusted from 4.6% to 5.1%, as geopolitical tensions continue in West Asia and energy consumption continues to rise.
Growth Forecast Lowered
Due to ongoing tensions in West Asia (Middle East) and supply chain disruptions, the RBI has lowered its economic growth (GDP) forecast. The GDP growth projection for the current financial year (FY27) has been reduced from 6.9% to 6.6%. Despite rising inflation risks, the Monetary Policy Committee (MPC) has decided to maintain a 'neutral' policy stance. The committee will monitor the situation and take further actions based on incoming data.
Concerns Over Inflation
Governor Sanjay Malhotra said that while retail inflation currently remains within the target range, rising fuel and energy prices—driven by global tensions—could exert pressure on the retail market and the public's finances in the future.
Fear of Weak Monsoon
Concerns have been raised regarding the forecast of a deficit (below-normal rainfall) southwest monsoon. This could directly impact agricultural output and demand in rural areas. However, government initiatives such as crop diversification are expected to help mitigate this impact.
Strong Service Sector
On a positive note, domestic economic activity remains robust. The manufacturing and services sectors are performing well, and consumption in urban areas is being supported by GST rationalization and stable employment. New measures for foreign capital: The scope of the Fully Accessible Route (FAR) for Government Securities (G-Secs) has been expanded. It will now include new government bonds with tenors of 15, 30, and 40 years, in addition to the existing 10-year bonds. To boost External Commercial Borrowings (ECB) by Public Sector Undertakings (PSUs), a concessional forex swap facility will be available until September 13, 2026.