The Reserve Bank of India maintained its benchmark repo rate at 5.25% on Wednesday, as policymakers await clearer evidence on whether rising oil prices are fuelling broader inflationary pressures in Asia's third-largest economy. According to Reuters, the six-member rate panel voted unanimously to keep rates on hold, with an overwhelming majority of 68 out of 72 economists forecasting this decision. The central bank's decision sets India apart from regional peers including Indonesia and the Philippines that have tightened policy in response to inflationary pressures from higher energy prices and war-driven currency volatility.
The Reserve Bank of India has announced it will continue with its exchange rate policy of being determined by market forces, as reported by Reuters. According to RBI Governor Sanjay Malhotra, the central bank will continue to curb excessive volatility, check speculative behaviour, and prevent disorderly movements to ensure the rupee remains fully synchronized with domestic fundamentals while maintaining stability in the foreign exchange market. The policy approach aims to ensure the rupee is not out of sync with fundamentals or disruptive of economic activity.
Headline inflation has moved above the central bank's target mainly because of higher fuel prices, while broader price pressures remain in check, RBI Governor Sanjay Malhotra said while announcing the policy. The central bank cut its forecast for average inflation in the current financial year to 5% from 5.1% it projected in June, and the forecast for core inflation was cut more steeply to 4.3% from 4.7% earlier. Retail inflation rose above the central bank's medium-term target of 4% for the first time in 17 months in June but is projected to stay within its tolerance band of 2%-6% in the current fiscal year.
The central bank nudged up its growth forecast to 6.7% from 6.6%, reflecting confidence in the economy's resilience despite mixed incoming data. While manufacturing activity has softened with the purchasing managers' index slipping to a five-year low, credit demand remains robust, expanding at nearly 18%. The benchmark Nifty 50 index was 0.1% higher, while BSE Sensex stayed 0.5% higher following the policy announcement. India's external balance of payments is on course to post a "healthy surplus" this year, with capital flow measures announced in June having boosted foreign inflows.
The central bank reported that India's foreign exchange reserves remain adequate according to standard metrics of reserve adequacy. According to Reuters, the country maintains an import cover of over 10 months and external debt cover of 90.8 per cent, providing sufficient buffer for economic stability. The initiatives announced in June have drawn more than $41 billion in inflows so far, along with lower oil prices and central bank dollar sales helping steady sentiment toward the rupee. The currency has recovered about 1% since June, although it remains down 5.4% for the year.
