IT WAS STATUS QUO WITH A DIFFERENCE

IT WAS STATUS QUO WITH A DIFFERENCE

When the Monetary Policy Committee (MPC) meeting concluded on 05-June, the outcome was rather benign. One would have logically expected the central bank to put more decision points on the table; or at least, give some guidance on what the RBI was thinking. However, there was hardly any signal from the RBI MPC, expect for giving a warning of sustained inflation. Eventually, the RBI MPC unanimously decided not to take any decision.

In a sense, the RBI MPC was not wrong in staying indecisive. The war in the Middle East is at a critical juncture, with a much greater possibility of the war ending soon. However, inflation may continue to remain elevated even after the end of the war. While India has sufficient food stocks and full reservoirs, El Nino poses a big risk. With IMD pegging rainfall at just 90% of LPA, the inflation-GDP matrix may keep the RBI in a policy dilemma.

KEY HIGHLIGHTS OF THE JUNE 2026 MONETARY POLICY

Here are some of the key takeaways from the June 2026 policy statement.

RBI held repo rates at 5.25%. All 6 members of the MPC voted unanimously to hold the rates at the current level. The monetary stance was also held at “Neutral.”

This holds the SDF (reverse repo) at 5.00%, while the bank rate and marginal standing facility (MSF) also stay at 5.50%. Both are repo-linked rates.

The GDP growth estimate for FY27 has been cut by another 30 basis points from 6.9% to 6.6% due to the impact of the Middle East conflict. It is down 80 bps in last 2 policies.

Inflation forecast for FY27 was raised by 50 bps from 4.6% to 5.1% due to crude and input inflation. Inflation has been raised by 90 bps in the last 2 policies.

With System liquidity surplus averaging ₹2,63,000 crore, it is a lot more comforting than a few months back. Also, the RBI dividend payout will boost liquidity this month.

Let us turn to the inflation and growth forecasts for FY27.

MPC RAISES FY27 INFLATION ESTIMATE BY 50 BPS TO 5.1%

The surge in WPI inflation to 8.3% in April is an indication that cost-push inflation is starting to rear its head. Also, the OMCs had raised prices of petrol and diesel in 4 tranches in recent weeks, and that would be transmitted to CPI inflation in a couple of months. Most economists have already pegged full year CPI inflation in the range of 5.5% to 6.0%. Apart from core inflation and fuel inflation, food inflation is also likely to be a major driver.

The latest IMD monsoon update has reduced the forecast for this year from 92% to 90% of long period average (LPA). That means, the drought will be more acute this year. While reservoirs are near full capacity and food stocks are comfortable, food inflation is likely to trend up. This is over and above the impact on fuel and precious metals inflation. The 5.1% projected CPI inflation for FY27 will have a quarterly distribution as under: Q1FY27 (4.2%), Q2FY27 (5.1%), Q3FY27 (5.9%), and Q4FY27 (5.4%). Due to the lag in transmission of fuel prices, the higher inflation is likely to get back-ended in FY27.

RBI MPC CUTS FY27 REAL GDP GROWTH BY 30 BPS TO 6.6%

For FY27, the real GDP growth has been cut by another 30 basis points to 6.6%; taking the total cut in real GDP estimates in last 2 months to 80 bps. The good news is that the domestic spending and consumption has stayed robust even amidst the West Asia crisis. That is evident in the high-frequency data points like freight, GST collections, e-way bills etc. Also, exports of goods and services were robust, despite the blockade of shipping routes.

While GST rationalization will continue to pay growth dividends, the higher inflation is likely to impact consumer demand sentiments. Also, the benefits of low GDP deflator will go away with rising inflation. Some of the government measures will take time to manifest. For FY27, the 6.6% GDP growth has been broken up quarter-wise as under: Q1FY27 (6.6%), Q2FY27 (6.3%), Q3FY27 (6.5%), and Q4FY27 (6.8%). A recovery is expected in second half of FY27.

SPECIAL RBI MEASURES TO ATTRACT FOREIGN CAPITAL INTO INDIA

In addition to the routine monetary announcements, the RBI also announced specific measures to attract long term foreign capital into India and shore up the rupee.

Government has already exempted G-Secs held by FPIs for over 1 year from the ambit of long-term capital gains tax of 12.5%.

For G-Secs under the fully accessible route (FAR), FPIs can also invest in new issues of 15-year, 30-year, and 40-year tenor G-Secs. Short term limits are also being scrapped.

NRIs and OCIs will get higher limits to trade in equity instruments without registration. In this regard, even Persons Resident outside India (PROI) get benefit at par with NRI/OCIs.

Concessional forex swaps for PSUs to raise ECB funds and bearing of full hedging cost for fresh FCNR (B) deposits from NRIs will also be provided to boost inflows.

The maximum time limit for realization of export proceeds is being restored to 9 months to ensure quick turnaround of forex liquidity.

Put together, these measures are expected to give a boost to forex flows into India and prop up the value of the Indian rupee. June 2026 policy comes at a crucial juncture when the future of supply chains and the future of inflation are uncertain. The August policy will have more data points on El Nino, monsoons, and inflation to take a more informed decision. The minutes of this RBI policy will be published on June 19, 2026. More concrete measures and a sense of direction can be expected in the August 2026 policy statement!