The Reserve Bank of India maintained the policy repo rate at 5.25% with the Monetary Policy Committee adopting a neutral stance as widely anticipated by markets. According to the latest reports, the central bank's decision was largely viewed as a non-event for markets as the outcome was largely on expected lines. The policy statement continues to suggest that RBI is willing to wait and watch and will adopt a more reactive approach with respect to policy rates, increasingly relying on non-monetary tools for liquidity and flows to steer the economy. Money markets fell by approximately 10 basis points and corporate bonds declined by 3-5 basis points following the announcement, reflecting positive market reaction to the policy stance. As per Emkay Global Financial Services, the policy tone stayed cautiously constructive, highlighting resilient domestic growth momentum and FCNR inflows while acknowledging geopolitical, global financial market, and El Niño risks.
The Reserve Bank of India has cut its 2026-27 consumer price index (CPI) inflation forecast to 5.0 per cent from the earlier projected 5.1 per cent, while raising real GDP growth projection to 6.7 per cent from 6.6 per cent. According to reports from Business Standard, the central bank's Monetary Policy Committee highlighted economic strength evident from different macro indicators. However, analysts believe the recent stability in Indian equities has been underpinned by easing geopolitical concerns and benign oil prices, but warn this calm is conditional. The inflation outlook remains well anchored, with core inflation around 4.3% and underlying price pressures largely contained, providing the central bank comfort to maintain its current stance. Core inflation forecast was pared by a sharper 40 bps to 4.3 per cent from 4.7 per cent in the June meeting, suggesting that demand pressures remain contained. As per Emkay Global Financial Services, the 30bps undershoot in 1Q CPI inflation vs the RBI's forecast led to mild downward revision to its FY27 inflation forecast by 10bps to 5.0 per cent.
RBI Governor Sanjay Malhotra confirmed that surplus liquidity in the banking system is expected to peak around September before being absorbed through normal economic requirements. Speaking at the post-monetary policy press conference, Malhotra explained that the surplus would be absorbed through an increase in currency circulation, higher reserve requirements as deposits grow, and the maturity of foreign exchange forward contracts. "Liquidity may be in surplus only for the very short term. It may peak in Q2 (FY27), around September or so, and going forward it should get absorbed because of our normal needs of the economy," Malhotra stated. He emphasized that the liquidity created would not be "extraordinary" or "substantial," noting that the RBI provides similar levels of liquidity every year through open market operations and foreign exchange swaps. The banking system liquidity surplus, measured by the average daily net position under the liquidity adjustment facility (LAF), averaged ₹1 trillion since the June policy meeting, with the weighted average call rate averaging 5.31 per cent since the June policy meeting, remaining within the policy corridor. Net liquidity in the banking system stood at a surplus of ₹3.33 trillion on Tuesday, the highest since April 20 this year, according to the latest data from the central bank.
The Committee raised its real GDP growth projections for FY27 marginally to 6.7 per cent from 6.6 per cent in the June 2026 policy, amidst a 40 basis point upward revision in the Q1 forecast to 7 per cent owing to the stronger-than-expected turnout of high frequency indicators for the quarter. According to ICRA's Chief Economist Aditi Nayar, the growth in volumes across several high frequency indicators has been quite robust in Q1-FY27. While it raised the growth forecast for Q2 by 10 bps to 6.4 per cent, that for Q3 and Q4 was kept unchanged at 6.5 per cent and 6.8 per cent, respectively. The Committee highlighted that deficient and uneven rainfall poses risks to the agri outlook and rural demand, but the commentary around urban demand, investment activity and exports was fairly positive. Risks to growth are evenly balanced, marking a shift from their prior judgment of downside risks in the June 2026 meeting. As per Emkay Global Financial Services, the MPC retained a constructive assessment supported by robust 1QFY27 growth momentum led by high-frequency indicators, with expectedly strong credit growth, auto sales, early 2Q corporate earnings and industrial activity all pointing to a cyclical recovery gaining traction.
The RBI will absorb surplus liquidity generated by the special forex swap facility through higher currency in circulation and maturing forward positions. Economists expect banking system liquidity to peak at a surplus of ₹4-5 lakh crore, prompting the RBI to start withdrawing excess liquidity through durable absorption measures. "Assuming India attracts around $60 billion through FCNR(B) deposits, I expect banking system liquidity to rise to a surplus of about ₹5 lakh crore. That would work out to roughly 2.5% to 3% of net demand and time liabilities (NDTL)," said Madan Sabnavis, chief economist, Bank of Baroda. Special central bank schemes to draw foreign exchange into the country have resulted in total dollar inflows of $40.81 billion through July 31, with FCNR(B) deposits accounting for about $36.72 billion of these inflows. Currently, system liquidity stands at a surplus of ₹3.33 lakh crore, while the daily average surplus stood at ₹1.01 lakh crore in June, amounting to around 1.2% of NDTL. "Yes, the liquidity will shoot up in September, but there are also advance tax outflows that happen during that month. Plus, there can also be intervention in the foreign exchange market that can drain liquidity. So I expect the surplus to peak at around ₹4 lakh crore, which would be about 1.4%-1.5% of NDTL," said Sakshi Gupta, principal economist, HDFC Bank.
