RBI Holds Repo Rate at 5.25%, Cuts GDP Forecast to 6.6% Amid Iran War and Oil Shock
RBI Governor Sanjay Malhotra announces June 2026 MPC decision
Executive Summary
The Reserve Bank of India's Monetary Policy Committee unanimously held the repo rate at 5.25% on June 5, 2026, maintaining a 'Neutral' stance while downgrading India's FY27 GDP growth forecast to 6.6% and raising the CPI inflation projection to 5.1%, citing geopolitical risks from the Iran war and elevated energy prices.
Key Takeaways
- ✓RBI unanimously held the repo rate at 5.25% on June 5, 2026, with a Neutral stance — a policy pause after 125 bps of cuts since February.
- ✓GDP growth forecast for FY27 cut from 6.9% to 6.6%; CPI inflation forecast raised from 4.6% to 5.1%.
- ✓Iran war and Strait of Hormuz closure cited as key upside risks to India's inflation and current account deficit.
- ✓RBI liberalised FPI access to government securities and raised NRI investment limits to attract foreign capital.
- ✓A rate hike by year-end is now plausible if oil prices remain elevated and inflation overshoots the revised forecast.
RBI Holds Rates at 5.25%, Downgrades Growth and Upgrades Inflation Forecasts
The Reserve Bank of India's six-member Monetary Policy Committee delivered an unanimous decision on Friday, June 5, 2026: the benchmark repo rate stays at 5.25% and the monetary stance remains 'Neutral' — reflecting a central bank caught between a resilient domestic economy and an increasingly hostile global environment.
The Decision
Governor Sanjay Malhotra announced the decision after the MPC's three-day deliberations (June 3–5). The decision was in line with market expectations: roughly 80% of economists surveyed in a Reuters poll (May 22–29) anticipated the hold. The rate at 5.25% reflects a total of 125 basis points of cuts since February 2026, a significant easing cycle now firmly on pause.
Revised Forecasts Signal Caution
The MPC's updated projections told a sobering story:
| Metric | Previous Estimate | Revised Estimate |
|---|---|---|
| FY27 GDP Growth | 6.9% | 6.6% |
| FY27 CPI Inflation | 4.6% | 5.1% |
| Core Inflation FY27 | — | 4.7% |
Governor Malhotra explicitly cited the prolonged West Asia conflict, elevated energy prices, supply-chain disruptions, and weather-related uncertainties as key risks. The closure of the Strait of Hormuz — which carries a significant portion of India's crude oil, LNG, and LPG imports — poses a direct threat to India's import bill and current account deficit (CAD), which Malhotra warned faces "upside risks from higher energy prices and persistent trade policy uncertainties."
FPI and Bond Market Liberalisation
In a market-positive move, the RBI announced liberalised norms for Foreign Portfolio Investors (FPIs) investing in government securities, and raised limits for Non-Resident Indian (NRI) investments. The move is intended to improve foreign investor participation and ease tax-related frictions — a signal that even while pausing rate adjustments, the RBI is focused on deepening India's capital markets.
Market Reaction
The BSE Sensex fell approximately 0.2% to 74,243 following the announcement, as investors digested the downgraded GDP outlook and raised inflation forecasts. Technology and metal stocks underperformed, partially offset by gains in financial stocks. The Sensex remained about 0.3% in the red for the full week.
Conclusion
The RBI's June decision reflects the bind facing India's monetary authorities: domestic growth has been strong (FY26 full-year GDP came in at 7.7%), but the external environment — particularly the Iran war's effect on energy prices — threatens to unwind the inflation progress achieved through the 125 bps easing cycle. A rate hike by year-end is now a plausible scenario if oil prices remain elevated.
Priya
Senior News CorrespondentCredentials: CFA, NISM Equity Research Analyst
Priya is an equity research writer with a focus on fast-moving consumer goods (FMCG) and automobile sectors in India.
