The RBI monetary policy committee held the repo rate unchanged at 5.25% along expected lines on Wednesday, with a unanimous vote. The neutral stance was maintained to provide flexibility to respond if geopolitical risks intensify, and tone was cautious with a higher emphasis on inflationary concerns than growth,. Underlying economic assumptions were revised (oil at $85pb in FY27 vs $70 in 2HFY26 and USDINR at 94.0 in FY27 vs 88.0 in 2H last year), which led FY27 inflation forecast to be pegged at 4.6% yoy (DBSf: 4.6%) from ~2.1% in FY26 and GDP growth at 6.9% yoy (DBSf: 6.5%). At the press conference, the Governor indicated that the recent USD/INR trading restrictions were needed to curb speculative, one-sided positioning in the FX pair, but suggested the measures could be rolled back once volatility subsides, without providing a specific timeline. In the absence of new policy-driven catalysts for the rupee and bond markets, domestic financial markets moved higher, supported by easing geopolitical tensions. Elevated risks from oil prices and geopolitical tensions limit the scope for near-term easing, reinforcing a prolonged pause. In our view, rate hikes would only be considered if second-round inflation effects begin to materialise more clearly, potentially driven by higher fuel prices and a subdued currency.
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