RBI likely to hold policy rates, despite looming inflationary pressure

New Delhi: The Reserve Bank of India (RBI) is likely to keep key policy interest rates unchanged in its second monetary policy review of the current financial year, despite mounting inflationary pressure amid the West Asia crisis and potentially weak monsoon.

The three-day meeting of the Monetary Policy Committee (MPC), the rate-setting panel of India’s central bank, is scheduled to begin on Wednesday.

According to analysts, the RBI is likely to maintain status quo on the policy interest rates for the third time in a row this year, after hiking it cumulatively by 125 basis points in 2025.

RBI Governor Sanjay Malhotra is scheduled to announce the MPC’s decisions on interest rates and economic outlook on June 5. Repo rate, the interest at which the RBI lends money to commercial banks for their short-term needs, remains steady at 5.25% since December 2025. 

SBI Research said in a note that the RBI would maintain status quo on policy rates against a volatile backdrop.

However, it suggested that the central bank to use “operation twist” tool to address market microstructure and support the rupee, which has depreciated sharply against most global currencies.

Operation twist refers to an unconventional monetary policy adopted by several central banks across the world to control interest rates, inflation, and investments. The RBI used this policy in 2019 and 2020 to revive the continuing economic slowdown. Under this operation, the RBI had twisted the yield of government securities to bring liquidity into the markets.

“Despite strong macro fundamentals, the rupee is depreciating much more vis-à-vis other currencies. Therefore, there is a need for augmented intervention by the RBI,” SBI Research said.

The RBI could use measures like operation twist, where short-term rates could rise at the expense of long-term rates. For instance, the Bank of Indonesia has recently hiked the rates even though it is an inflation targeting regime just to defend Indonesian Rupiah, it said.

SBI Research noted that India’s forex reserves are optimally sufficient to combat the unidirectional slide of rupee. “While aiming to curb excess/undesired volatility concomitantly as the prime aim, there is a clear felt need for a comprehensive BOP package,” it added.

India’s forex reserves fell by $7.51 billion to $681.38 billion for the week ended May 22, as per the latest data released by the RBI. It has declined cumulatively by $47 billion since February 27, a day before the outbreak of the Iran war.  

Significant outflow of foreign money from the Indian markets has added to the pressure on the rupee. Net equity outflow from the Indian equities amounts to $22.7 billion since the onset of the war.

“Poor earnings growth in India, much superior earnings growth in countries like the US, Japan, South Korea and Taiwan, and the strong AI-related trade in these countries, particularly in South Korea and Taiwan, contributed significantly to the FPI-selling in India and moving the money to the above mentioned markets,” said VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited.

Rupee, which was about 90 to the dollar at the beginning of this year, steadily depreciated to 96.96, recently. 

According to SBI Research, India’s GDP growth is likely to be closer to 7.2% in the January-March 2026 quarter. For the full FY2025-26, the growth is pegged at 7.5%. It is likely to slow to 6.6% in the current fiscal.

In its Monthly Economic Review report released on Saturday, the Union Finance Ministry underlined the need for policy vigilance amid the uncertain global economic environment.

“The confluence of elevated global energy prices, a depreciating rupee, rising upstream cost pressures and the prospect of a below-normal monsoon calls for sustained policy vigilance,” it said.

“Navigating FY27 will require agility across monetary, fiscal and structural dimensions to safeguard growth momentum and keep inflation durably anchored, even as the global environment remains uncertain,” the report noted.