RBI Holds Rates at 5.25% as Growth Slows, Inflation Rises, June 05

The Reserve Bank of India kept its policy repo rate unchanged at 5.25% on June 5, 2026, marking the third consecutive hold. Governor Sanjay Malhotra cited the West Asia conflict as a key risk to both inflation and growth. The RBI lowered its FY27 GDP growth forecast to 6.6% from 6.9% and raised inflation expectations to 5.1% from 4.6%, signalling a cautious stance as external pressures mount.

Why the RBI Paused on Rate Cuts

The Monetary Policy Committee voted unanimously to hold the repo rate at 5.25%, where it has remained since December 2025. Upside risks to inflation and downside risks to growth prompted the pause, with the West Asia conflict creating supply-chain disruptions and pushing crude oil prices higher. The RBI noted that elevated fuel and commodity costs are already passing through to households, eroding purchasing power and complicating the inflation picture.

Growth Slows, Inflation Accelerates

The RBI revised its real GDP growth forecast downward to 6.6% for FY27, down from the earlier projection of 6.9%. At the same time, the central bank raised its retail inflation forecast to 5.1% from 4.6%, citing food inflation risks from sub-normal monsoon conditions and possible El Niño effects. These revisions reflect considerable risks to both inflation and growth from external shocks and supply constraints.

New Measures to Attract Foreign Capital

The RBI announced a host of measures to boost dollar inflows and support the rupee. The central bank expanded the Fully Accessible Route (FAR) for government securities by including all new 15-, 30-, and 40-year tenor bonds. The RBI also removed limits on short-term FPI investment, concentration, and individual securities under the General Route. The RBI raised limits for NRI and OCI investments in equity instruments and announced concessional forex swap facilities for PSU external commercial borrowings until September 30, 2026. The central bank will also bear full hedging costs on fresh 3–5-year FCNR(B) deposits through the same date.

Market Reaction and Rupee Strength

Indian equity markets turned weak after the RBI’s decision. The Nifty50 fell 49.85 points, or 0.21%, to close at 23,366.70, while the Sensex dropped 116.67 points, or 0.16%, to 74,243.34. IT and metal stocks led the decline. However, the rupee strengthened 81 paise to close at 94.93 against the US dollar, marking its best session in two months. The 10-year bond yield fell as investors assessed the RBI’s foreign capital measures.

Final Thoughts

The RBI’s pause signals a wait-and-see approach as external risks cloud the outlook. With growth slowing and inflation rising, rate cuts remain unlikely until clarity emerges on global conditions and supply pressures ease.

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