STATUS QUO WITH INFLATION WARNING

STATUS QUO WITH INFLATION WARNING

Even before the 3-day meeting of the Monetary Policy Committee (MPC) ended, the street was already unanimous that RBI will not touch the repo rates. After all, there was no immediate reason to do so. The decision to hold rates at 5.25% and to maintain the stance at “Neutral” was unanimous among the RBI MPC members. For the RBI, there are several X-factors and it would be best to wait out for another 2 months before making a decision.

The situation in the Gulf remains fluid, although there is promise of an early deal between the US and Iran. Inflation this year is not just impacted by crude prices, but also by food prices; which are factoring in El Nino fears. The good news is that core inflation is in control, so it is not getting internalized. Also, Q1 GDP growth promises to be better than expected, but risks to nominal growth still persist. Status quo on repo rates was an obvious choice.

KEY HIGHLIGHTS OF THE AUGUST 2026 MONETARY POLICY

Here are some of the key takeaways from the August 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 maintained at “Neutral.”

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

The GDP growth estimate for FY27 has been raised by 10 basis points from 6.6% to 6.7% due to strong domestic demand signals. It is still down 70 bps over the last 3 policies.

Inflation forecast for FY27 was cut by 10 bps from 5.1% to 5.0% as core inflation has stayed anchored. Inflation estimates are higher by 80 bps over the last 3 policies.

With System liquidity surplus averaging ₹1,00,000 crore per day, RBI will deploy a mix of OMOs and VRRRs to soak up excess liquidity in the system.

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

MPC CUTS FY27 INFLATION ESTIMATE BY 10 BPS TO 5.0%

Is a 10-bps cut in inflation estimate really material? It is at best a signal to the market that (under ceteris paribus conditions) we may have seen the worst of inflation. The MPC is right when it says that the incremental inflation in the last few months has come from food and fuel inflation. Core inflation overall has stayed anchored around 3.9%-4.0%. Also, the core inflation (ex-precious metals) is just about 2.4%. The expectation of the MPC is that the headline core inflation will also align to 2.4% level during FY27.

Why has the RBI MPC cut inflation forecasts despite the El Nino risks? While rainfall has been 13% below average as of end-July, the Kharif sowing has been just 3.5% short of the previous year. Precious metals inflation has softened in the last few months and that is likely to rub off on core inflation. The 5.0% projected CPI inflation for FY27 will have a quarterly distribution as under: Q2FY27 (4.7%), Q3FY27 (5.9%), Q4FY27 (5.5%), and Q1FY28 (5.3%). Inflation is expected to peak in the third quarter of FY27.

RBI MPC RAISES FY27 REAL GDP GROWTH BY 10 BPS TO 6.7%

For FY27, the real GDP growth has been raised by 10 basis points to 6.7%. High frequency data points like freight, GST collections, e-way bills, steel, and cement output continue to stay robust. While trade deficit has gone up compared to the previous year, exports have also been strong and the big saving grace has been the domestic demand filling the gap. Quarterly results are hinting at a front-ended revival in GDP growth in Q1 at 7.0%.

One concern on the real GDP front this year could be the higher GDP deflator, due to sharply higher inflation in FY27. According to the latest IMF estimates, India continues to be the fastest growing large economy in the world. For FY27, the 6.7% GDP growth has been broken up quarter-wise as under: Q1FY27 (7.0%), Q2FY27 (6.4%), Q3FY27 (6.5%), and Q4FY27 (6.8%). GDP recovery is likely to be front-loaded.

UPDATE ON SPECIAL FOREX INFLOW SCHEME ANNOUNCED IN JUNE 2026

The RBI had announced a special scheme to attract foreign capital through FCNR(B) deposits, OFCBs, and EBs. Here is a quick update.

While the start was slow, due to procedural delays, IFSC readiness, and fixing the bells and whistles, the momentum of flows has picked up sharply in July 2026.

Total flows through FCNR(B) deposits, OFCBs, ECBs have already crossed $40 billion, with FCNR(B) flows accounting for over $35 billion in inflows.

Considering the attractive rates, high leverage, and forex risk guarantee from RBI, the total collections from this window are estimated closer to $90 billion by September.

In the August 2026 policy statement, RBI governor has categorically affirmed that there were no plans to either shut the FCNR(B) scheme prematurely, or to extend it longer.

The FCNR(B) deposits are likely to help boost forex reserves, stabilize the rupee and also act as a counterweight for the massive dollar short position that the RBI needs to cover.

DEVELOPMENT AND REGULATORY POLICIES ANNOUNCED

Here is a gist of some of the key development and regulatory policies announced by the RBI, outside the ambit of the monetary policy.

RBI will review its licensing norms for urban cooperative banks (UCBs) on issue of fresh licenses. The feedback is being collated and draft guidelines are expected soon.

Considering the expansion of volumes of cooperative banks, the prudential norms for concentration risk management for such banks overall will be reviewed.

RBI plans to unify guidelines for interest rates on advances to iron out anomalies on interest rates for all regulated entities (REs). It will enhance transparency in loan pricing.

The minutes of this RBI policy will be published on August 19, 2026. More concrete measures and a sense of direction will follow in the October 2026 policy statement!