RBI to hold rates through 2026 as growth risks outweigh inflation: Poll of economists
A poll of economists suggests the Reserve Bank of India will keep its key policy (repo) rate unchanged at 5.25% through the rest of 2026.
This marks a shift from an earlier poll, when a rate hike had been expected in the following quarter.
Economists cite slowing economic growth and geopolitical/war-related uncertainty as reasons the central bank is likely to avoid a hike even though inflation has moved above its target.
The central bank is expected to refrain from using the policy rate as a tool to defend the weakening rupee, since interest-rate changes are seen as an ineffective lever for currency management.
India's GDP growth for the fiscal year is forecast to slow compared to the previous year.
Flexible Inflation Targeting (FIT) Framework
India adopted a Flexible Inflation Targeting framework in 2016, under which the Reserve Bank of India Act, 1934 was amended by the Finance Act, 2016 to make price stability the primary objective of monetary policy while keeping growth in view. The government sets a CPI inflation target with a tolerance band, and the RBI's rate-setting body works to keep inflation within that band.
Key Details
- Target: 4% CPI inflation, with a tolerance band of +/- 2 percentage points (i.e., 2%–6%).
- The framework was reviewed and the 4% target with the same band was retained for the next five-year period (April 2026–March 2031) by the Central Government.
- The Monetary Policy Committee (MPC), a six-member body (three RBI members including the Governor, three external members appointed by the Government), determines the repo rate needed to meet the inflation target.
Even though current inflation is running above the 4% target (though within the 2–6% tolerance band), the MPC's flexible mandate allows it to tolerate short-term deviations rather than hike rates, especially when growth risks are elevated — exactly the situation the poll describes.
Repo Rate as the Key Policy Instrument
The repo rate is the interest rate at which the RBI lends short-term funds to commercial banks against government securities, and is the primary instrument through which the MPC transmits its monetary policy stance to the broader economy (credit costs, investment, and consumption).
Key Details
- Repo rate cited in the poll: 5.25%, expected to be held steady through the rest of 2026.
- A rate hike would raise borrowing costs economy-wide, weighing further on already-slowing growth — cited as the key reason economists expect a hold.
- Currency management (defending the rupee) is conventionally handled by the RBI through foreign exchange market intervention (spot/forward operations, forex reserves) rather than through the policy rate.
The poll's expectation that the RBI will neither hike (despite above-target inflation) nor use rates to support the rupee reflects the standard division of tools within India's monetary policy framework: the repo rate is reserved for the inflation-growth trade-off, not exchange-rate defense.
- Repo rate expected to be held at 5.25% through 2026.
- India's growth forecast: slowing from roughly 7.7% in the previous fiscal year to about 6.6% this fiscal year (as per the underlying poll).
- Inflation projected to average around 4.8% this fiscal year, above the RBI's own 4% target but within the 2%–6% tolerance band.
- RBI's inflation target and tolerance band (4% +/- 2%) retained for the five-year period April 2026–March 2031.