Editorial: RBI’s guarded approach amid global uncertainties

RBI's policy direction is unambiguous to attract dollars rather than tighten liquidity conditions through rates

The global economic environment continues to be volatile and unpredictable. The prolonged West Asia conflict has pushed up global energy prices, disrupted supply chains and increased volatility across financial markets. For India, this is translating into a weaker currency, higher imported inflation risks and rising concerns over the balance of payments. Against this grim backdrop, the Reserve Bank of India’s decision to keep the benchmark repo rate unchanged at 5.25% must be seen as a reflection of a cautious approach to managing external risks. The central bank has relied on a neutral stance to balance inflation control with economic stability. The Monetary Policy Committee (MPC) voted unanimously to keep the repo rate unchanged, for the third time in a row, amid a weakening rupee and fears over rising inflation. On the economic outlook, the RBI has lowered the GDP growth forecast for the financial year 2026-27 to 6.6% from its earlier estimate of 6.9%. Inflation is projected to average 5.1%, up from the earlier estimate of 4.6%, mainly driven by higher LPG, base metal, plastic, and rubber prices. Food inflation is a cause for concern with a subnormal monsoon forecast. All this implies that inflation is edging upwards at a time when growth appears to be slowing down. The implications of the ongoing war in Iran have forced the RBI to guard against imported inflation and balance-of-payment risks. Instead of tightening liquidity through higher rates, the central bank has unveiled coordinated measures to attract foreign capital, ease pressure on the Indian rupee, and maintain stability in credit and real estate markets.

The June policy marked a subtle but important shift, from relying primarily on interest rates to actively deploying the capital account as the first line of defence. With inflation still broadly within tolerance and growth risks rising, the MPC chose to wait for greater clarity on the persistence of global shocks and the transmission of cost pressures into domestic inflation. More importantly, the RBI has unveiled a series of capital flow and external sector measures – a concessional swap facility for PSU external borrowing, full hedging cost support for FCNR(B) deposits, extension of export realisation timelines, and further liberalisation of foreign investment limits in government securities. These were complemented by the government’s move to remove capital gains tax and interest withholding tax on foreign portfolio investment in specified government bonds. All these are steps in the right direction. Taken together, the policy direction is unambiguous to attract dollars rather than tighten liquidity conditions through rates. The logic is rooted in India’s external balance dynamics. Higher crude prices have widened concerns over the current account deficit, while foreign portfolio flows remain weak, particularly in equities. Rather than relying on rate hikes to stabilise the currency, policymakers appear to be focusing on creating multiple, targeted channels for durable capital inflows.

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