RATE PAUSE TO CONTINUE IN AUGUST 2026

RATE PAUSE TO CONTINUE IN AUGUST 2026

To be fair, India has all the ingredients for a rate hike. Inflation continues to be well above 5% and is threatening to cross the upper permissible range of 6%. GDP growth has been more robust than expected, with Q1 GDP growth expected to be closer to 7.0%. Thirdly, India has been looking at tools to defend the rupee and a rate hike may be a simple way to boost flows and defend the rupee. However, despite these obvious reasons, it is very likely that the August RBI Monetary Policy may choose to hold repo rates at 5.25%.

In the June policy, the RBI avoided touching rates or even giving any sort of rate guidance. While the RBI is likely to avoid rate hikes in August too, there is a strong possibility of a rate guidance from the RBI in this policy. Whether it does it through its communication language or through its stance, remains to be seen. For now, the big news is the dollar inflows through the FCNR(B) window, which has crossed $40 billion and look set to touch $85-90 billion by end of September 2026. Rate hikes are unlikely to be considered before that!

RECAP OF KEY ANNOUNCEMENTS OF JUN-26 MONETARY POLICY

Here are key highlights of the June 2026 policy statement.

RBI MPC held the repo rate at 5.25% in the June meeting; and kept the stance of the monetary policy at Neutral. This also held SDF rate and MSF/Bank rate at same levels.

The FY27 GDP growth estimate was cut by another 30 bps to from 6.9% to 6.6% in June; to reflect supply chain constraints and pressure on agricultural output.

The inflation forecast for FY27 was raised by 50 bps to 5.1%, to reflect higher prices of crude oil and the impact of El Nino on the Kharif harvest this year.

Let us turn to the specific expectations from August 2026 monetary policy.

WILL RBI FINALLY HIKE RATES IN AUG-26 POLICY?

Inflation remains a big concern for India, with bulk of the inflation still being imported; and difficult to control. Oil prices had given some hope by dipping to $72/bbl. However, sustained unrest in the Middle East resulted in oil bouncing to 100/bbl, before settling around $85/bbl. Markets are taking a more rational view of oil prices, but the disruption of the Straits of Hormuz and the Bab-al-Mandeb remain potent risks. Both, the inflation expectations and the weak rupee do make a case for a rate hike of 25 bps.

However, there are 2 factors that may impel the RBI to hold rates at 5.25% in August policy. Firstly, the impact of weak monsoons on Kharif is expected to be limited. While monsoons as of end-July was 13% in deficit, the Kharif sowing is just about 4.5% below the 2025 levels. Unless August sees a near drought, farm output should be well in control. Secondly, the FCNR(B) special window closes on 30-September and flow indications have been positive. The RBI would see merit in waiting till October before taking a decisive rate call.

WILL RBI CHANGE ITS STANCE FROM “NEUTRAL” IN AUG-26?

With rising inflation and uncertain monsoons this year, the change of stance from the current “Neutral” to “Accommodative” is almost ruled out. That would be out of sync with all the inflation efforts that the government is putting in. However, the question is whether the RBI would stick its neck out and change the RBI policy stance to “Hawkish.”?

That is a possibility that cannot be ruled out. The RBI is likely to hold repo rates at 5.25% in its August policy meet. However, it could use a shift to “Hawkish” stance as a precursor to a rate hike. That would sensitize the markets to inflation risks in the economy, without really impacting the revival in GDP. Change in stance is an outside possibility, although the RBI may prefer to just tweak its communication language.

WILL RBI RAISE FY27 REAL GDP GROWTH ESTIMATES?

In the last 2 policies in April and June, the RBI MPC had cut the GDP estimates for FY27 by 80 bps cumulatively from 7.4% to 6.6%. While nominal GDP for FY26 was lower than expected, the Indian economy has shown resilience to the geopolitical risk, thanks to domestic demand support. The Q1 GDP growth for the June quarter will be announced on the last day of August and that is expected at 7.0%, which is 40 bps better than the RBI’s Q1 estimate of 6.6%. With Kharif sowing just 3.5% below 2025, and manufacturing and services GDP growth robust, the RBI has reasons to hike the GDP estimate for FY27 by 20-30 bps. It will depend on how the RBI interprets the data, but a GDP growth hike can send the right signal.

WILL RBI CHANGE FY27 INFLATION ESTIMATES?

In the April and June policies, the RBI had raised the cumulative inflation estimate by 90 bps from 4.2% to 5.1%. There have been several factors driving the hawkish shift. Crude prices have rallied sharply since the start of the war, prices of most industrial inputs have gone up due to supply chain constraints, and El Nino poses a major risk. For FY27, the average inflation is expected in the range of 5.4%-5.5%. While that would still be within the 6% upper limit of the RBI, the central bank has to give a signal to the market that inflation risks are still rampant. That is likely to be done through a 30-40 bps hike in inflation expectations.

HOW WILL RBI MANAGE THE LIQUIDITY IN THE SYSTEM?

Going ahead, the RBI is going to face a problem of plenty and so the focus would have to be on managing the surplus liquidity. Today, if you look at the system liquidity and add the government cash balances to it; the figure stands at closer to ₹5 trillion. Government cash balances have turned robust due to RBI dividend payout in May and the advance tax collections in June. With the substantial dollar flow from FCNR(B), OFCBs, and ECBs; the forex swaps could take the liquidity to above ₹10 trillion. Obviously, the RBI will deploy a mix of OMOs and VRRRs to soak in this surplus. A clearer plan is expected in the policy.

CAN RBI CONSIDER A RATE HIKE RATES TO DEFEND THE RUPEE?

One debate that has been doing the rounds; should the RBI defend the rupee by hiking rates? That is unlikely for the following reasons.

There has been no empirical evidence in the Indian context that rate hikes have necessarily helped the rupee to harden. Hiking rates to defend the rupee may be a risky strategy as it has implications for GDP growth and also for cost of debt.

The FCNR(B) special window has already collected $40 billion (including OFCBs and ECBs). The figure is expected to scale $85-90 billion by the close of the window on 30-Sep. With that kind of dollar inflows, RBI will not see further need to defend the rupee.

The 3-day MPC meet will culminate on 05-Aug with the policy announcement. The RBI and the government are, clearly, breathing more freely than they were doing a few months back. That gives the RBI the luxury to wait and watch on actual rate shifts!