The Reserve Bank of India (RBI) is expected to keep its key policy rate unchanged this week, a move that diverges from many global central banks that have raised rates in the last five months. Central banks in Europe, Australia, Indonesia, the Philippines, Singapore, South Korea and South Africa have increased borrowing costs, while the U.S. Federal Reserve and Japan’s Bank of Japan have held rates steady. The RBI’s Monetary Policy Committee (MPC) is likely to adopt a cautious tone but will hold rates on Wednesday, according to a Reuters poll.
Retail inflation rose to 4.38% in June, the first time it exceeded the RBI’s 4% target in 17 months. However, the figure remains inside the 2%-6% tolerance band that the RBI uses to give itself room to tackle short-term supply shocks. Core inflation, which excludes volatile food and fuel prices, has stayed near 4%.
Samiran Chakraborty, Citi’s chief India economist, said that while core and underlying inflation have climbed modestly, they still lie within the RBI’s comfort zone. He added that a rate hike is unlikely in 2026 unless core inflation stays above 4.5% for an extended period.
RBI Governor Sanjay Malhotra told the Hindu Business Line that the impact of higher fuel prices on general inflation is still limited. A central‑bank survey in May, however, showed rising inflation expectations, and wholesale inflation climbed to 9.87% in June.
Axis Bank economist Tanay Dalal expects the MPC to acknowledge the risk of firmer inflation and to keep a data‑dependent approach. He notes that wholesale‑price pressure could filter into consumer prices over a three‑to‑four‑month horizon, tightening the room for policy flexibility.
Interest‑rate swap markets are pricing about 75 basis points of rate hikes over the next 12 months. The rupee fell to a record low before the policy meeting, sparking calls for higher rates to defend the currency, similar to actions taken by Indonesia and the Philippines. Instead, the RBI scrapped the capital‑gains tax for foreign holders of Indian government bonds and sweetened dollar‑deposit schemes for non‑resident Indians, which attracted almost $40 billion in inflows and briefly lifted the rupee.
Senior economist Trinh Nguyen of Natixis said that the rupee will remain under pressure until the RBI raises rates, which would widen rate differentials and make Indian assets more attractive to foreign investors. He added that, compared with similarly rated markets, India’s real yields are not the most compelling story right now.
In summary, the RBI is likely to keep rates steady this week, but prolonged delays could eventually force a hike as market expectations and currency pressures build.