RBI repo rate pause: Economists say long-term growth prospects intact
Synopsis
The RBI held its repo rate steady and economists are broadly supportive — but the calm may be temporary. With inflation potentially heading toward 5.9% and a below-normal monsoon on the horizon, Bank of Baroda's chief economist is already flagging one to two rate hikes before the year is out.
Key Takeaways
The RBI kept the policy repo rate unchanged on 5 June , prioritising financial stability and long-term growth.
PHDCCI leaders said the decision creates a conducive environment despite rising geopolitical risks dampening FY2027 GDP prospects.
Madan Sabnavis of Bank of Baroda forecast 1-2 rate hikes later in the year if inflation approaches 5.9 per cent .
Supply shocks, high energy prices, and a likely below-normal monsoon were flagged as near-term risks to growth.
The RBI's steps to shore up forex via FPI, ECB, and FCNR (B) deposits were cited as a positive surprise by economists.
LIC Housing Finance and Indian Bank leaders said the stable rate regime will support housing demand and RAM segment credit growth.
The Reserve Bank of India (RBI) has opted to hold the policy repo rate unchanged, a decision that economists and industry leaders say prioritises financial stability and keeps medium-to-long-term growth prospects on track. The verdict, welcomed broadly on Friday, 5 June, comes as external uncertainties — from geopolitical tensions to supply-chain disruptions — continue to cloud the global economic outlook.
Balanced Policy in an Uncertain Climate
Dr Ranjeet Mehta, CEO and Secretary General of the PHD Chamber of Commerce and Industry (PHDCCI), said the decision reflects a carefully calibrated response to the upside risks currently facing the economy. He noted that while external headwinds have intensified, the RBI's stance creates a conducive environment for sustaining growth over the medium to long term.
Rajeev Juneja, President of PHDCCI, added that although inflation remains within the target band of plus or minus 4 per cent, geopolitical risks affecting global supply chains have increased, dampening GDP growth prospects for FY2027. 'The Indian economy still remains resilient with strong domestic demand,' Juneja said.
Rate Hike Risk Remains on the Table
Madan Sabnavis, Chief Economist at Bank of Baroda, struck a more cautious note, forecasting one to two rate hikes later in the year if inflation climbs toward 5.9 per cent. 'We are looking at 1 to 2 hikes this year. It does look like there is a monsoon impact which has been buffered here,' Sabnavis said.
Experts also flagged that supply shocks, elevated energy prices, and a likely below-normal monsoon could temper growth prospects in the near term. Sabnavis separately highlighted what he called 'positive surprises' from the RBI — specifically the 'aggressive and comprehensive steps taken to get forex through FPI, ECB and FCNR (B) deposits.' He noted that the forex market has responded positively, though whether this can shift the direction of FPI flows in the debt segment remains to be seen.
Banking and Housing Sectors Welcome the Pause
Binod Kumar, MD and CEO of Indian Bank, called the measures to stabilise the rupee a welcome move. 'Amid a geopolitical crisis, the Indian economy displayed great resilience and has withstood global headwinds. RBI's decision to maintain rates underscores its focus on growth,' Kumar said. He added that demand in the Retail, Agriculture, and MSME (RAM) segments is expected to continue growing as pro-growth policies take effect, and that the policy 'enhances confidence in the fundamentals of the Indian economy.'
Tribhuwan Adhikari, MD and CEO of LIC Housing Finance, said a stable rate environment should directly support housing demand. He noted that the continuation of current rates is expected to bolster borrower confidence, improve credit flow, and sustain housing demand across markets.
What This Means Going Forward
This comes amid a broader global trend of central banks navigating the tension between controlling inflation and protecting growth. The RBI's hold signals confidence in domestic fundamentals even as it acknowledges external risks. The next pivotal test will be the monsoon season and incoming inflation data — both of which could determine whether the central bank shifts course in the second half of the year.
Point of View
But the consensus masks a real divergence: inflation is still within target, yet one of India's leading bank economists is already pricing in rate hikes by year-end. The monsoon variable is the wildcard — a below-normal season would simultaneously push food inflation higher and compress rural demand, leaving the RBI with no clean move. The forex stabilisation measures are a structural positive, but FPI debt flows remain sentiment-driven and can reverse quickly. The housing and MSME sectors are cheering today, but their relief depends on a rate environment that may not last the full year.
NationPress
21 Jul 2026
Frequently Asked Questions
Why did the RBI keep the repo rate unchanged?
The RBI held the policy repo rate steady to preserve financial stability and support medium-to-long-term growth, even as geopolitical risks and global supply-chain disruptions have increased. Inflation remains within the target band of plus or minus 4 per cent, giving the central bank room to hold.
Could the RBI raise rates later in 2025?
Yes, according to Madan Sabnavis, Chief Economist at Bank of Baroda, who has forecast one to two rate hikes if inflation rises toward 5.9 per cent. A below-normal monsoon and elevated energy prices are the key upside risks to inflation being watched.
How does the rate pause affect the housing sector?
Tribhuwan Adhikari, MD and CEO of LIC Housing Finance, said a stable rate environment is expected to sustain borrower confidence, improve credit flow, and support housing demand across markets. A rate hold keeps EMIs steady, which directly benefits retail home-loan borrowers.
What did the RBI do to stabilise the forex market?
The RBI took what economists described as 'aggressive and comprehensive' steps to boost forex reserves through FPI, ECB, and FCNR (B) deposits. The forex market has reacted positively, though whether this will shift FPI flows in the debt segment over the longer term remains to be seen.
Which sectors are expected to benefit from the RBI's decision?
Retail, Agriculture, and MSME (RAM) segments are expected to see continued demand growth, according to Binod Kumar, MD and CEO of Indian Bank. The housing sector is also seen as a direct beneficiary of a stable borrowing-cost environment.
