Will RBI hold repo rate at 5.25%? Here’s what economists expect from June MPC meet and why

In light of the present pressure situation arising from volatile energy markets, continuing supply chain disruptions and a depreciating rupee, economists interviewed by PTI expect RBI to lower inflation forecast and lower its GDP growth estimate at its bi-monthly Monetary Policy Meeting from June 3 to 5.

The six-member Monetary Policy Committee, headed by RBI Governor Sanjay Malhotra, will announce its decision on June 5 after a three-day meeting from June 3 to 5.

As per economists interviewed by PTI, the central bank is likely to avoid an immediate rate move and instead use the policy statement to signal caution.

Economists expect the RBI to retain its neutral stance, while closely examining how higher oil prices and a weaker rupee begin to feed into retail inflation.

The repo rate is the rate at which the RBI lends short-term funds to banks. A change in this rate can affect home loan, auto loan and business loan rates over time. A pause means borrowers may not see an immediate change in lending rates, though banks can still revise rates depending on their funding costs and liquidity conditions.

Why RBI may pause

The case for a pause has strengthened because of the current inflation pressure that’s been brought on largely by supply-side disruptions triggered by the ongoing war between US-Israel and Iran. These include high fuel prices, imported input costs, global supply chain disruption and currency weakness.

Economists say interest rate hikes are less effective when inflation is driven by external shocks, such as crude oil and geopolitical risk. They argue that while an initial hike in repo rates can cool demand, it cannot directly bring down global oil prices or open disrupted supply routes.

In April, the RBI had also kept the repo rate unchanged at 5.25% and maintained a neutral stance.

That decision came after the central bank had already reduced the policy rate cumulatively by 100 basis points in 2025-26. The June policy, therefore, is expected to be more about messaging than action. The RBI may keep rates unchanged but sound more cautious on inflation.

Inflation forecast likely to be raised

Majority of the economists interviewed by PTI strongly anticipate RBI to raise its inflation estimate and lower its growth projection for FY27.

Madan Sabnavis, Chief Economist at Bank of Baroda, does not expect any change in the repo rate or stance. However, he says the tone may be cautious and lean hawkish. He expects the RBI to raise its inflation forecast towards 5% and lower its GDP growth forecast closer to 6.5% from 6.9%.

SBI’s economic research department also expects the RBI to maintain the status quo in the June policy. It expects CPI inflation to stay above 5% for the next three quarters, while estimating Q4FY26 real GDP growth closer to 7.2%

SBI Research had recently cast FY27 GDP growth at 6.6%, though it said the numbers may be revised as more data comes in.

Retail inflation had risen slightly to 3.48% in April, led mainly by higher prices of gold and silver jewellery and some kitchen items. The government has mandated the RBI to keep CPI inflation at 4%, with a tolerance band of two percentage points on either side.

While this remains below the RBI’s upper tolerance band, the worry is that a sustained rise in crude oil can push up transport, fuel and input costs. Statements made by prominent economists across the country along with recent data suggest that inflation should ideally remain between 2% and 6%.

Crude oil, rupee and Strait of Hormuz risks

The biggest risk for the RBI is crude oil. India imports a large share of its crude requirement, making the economy vulnerable to a global oil price shock.

A prolonged disruption around the Strait of Hormuz could raise energy prices further as was recently confirmed by the former deputy chairman of India’s Planning Commission, Montek Singh in an interview with The Indian Express.

If crude stays elevated for a long period, fuel and logistics costs can rise across industries, which can push up prices for households and companies. An example of this can also be seen via recent hikes in prices of products in the FMCG space.

Dipti Deshpande, Principal Economist at Crisil, says the RBI is likely to maintain the repo rate and retain a neutral stance. She adds that current inflation pressures are largely supply-driven and come from elevated fuel and input costs, along with a weaker rupee.

The rupee is another key variable. A weaker rupee makes imports costlier, especially oil and other commodities priced in dollars. This can add to imported inflation.

As per SBI Research, MPC may need to debate the role of the exchange rate as a policy anchor beyond its pure inflation-targeting mandate.

In simpler terms, this means the RBI may have to watch the rupee more closely because currency weakness can quickly spill over into domestic prices.

What RBI’s recent moves mean

As per economists interviewed by PTI, RBI’s recent decisions show that it has preferred a mix of rate pause, liquidity management and currency stabilisation rather than rushing into another rate increase.

Liquidity management means the RBI adjusts the amount of money available in the banking system. When liquidity is tight, borrowing costs can rise even without a repo rate hike. When liquidity is comfortable, banks may have more room to lend.

Vinay Pai, MD and Head of Fixed Income at Equirus Capital, says market expectations are currently pricing in a potential 25-50 basis point rate hike, though recent RBI actions suggest a preference for liquidity management and currency stabilisation over immediate tightening.

A rate hike, he says, would depend on sustained macro stress. If crude prices remain above $100 per barrel for an extended period, inflationary pressure could force the central bank to consider a cumulative 50 basis point hike by August, though that is not the base case at present.