RBI's dovish tone strengthens as MPC holds repo rate at 5.25%, sees higher FY27 growth and lower inflation: Report

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) unanimously kept the repo rate unchanged at 5.25% while retaining its "neutral" policy stance, signalling confidence in the resilience of the domestic economy despite global uncertainties, according to a report by SBI Ecowrap. 

The report noted that the RBI raised its FY27 real GDP growth forecast by 10 basis points to 6.7% while lowering its consumer price inflation (CPI) projection by an equivalent 10 basis points to 5.0%. The central bank also revised its Q1FY27 growth estimate upwards to 7.0%, reflecting stronger-than-expected economic momentum. 

The RBI expects growth to remain robust in the first quarter of FY28 at 7.3% while projecting inflation at 5.3%, suggesting that the growth-inflation trade-off remains well balanced. 

Policy statement turns more dovish 

Using a lexicon-based Natural Language Processing (NLP) framework to analyse the RBI Governor's policy statement, the report found that the central bank's communication has become significantly more dovish. 

According to the analysis, the Dovish Communication Index accounted for 50.9% of all policy-related lexical references, up from 40.8% in the previous policy statement. The Uncertainty Communication Index declined to 25.4% from 34.8% while the Hawkish Communication Index eased to 23.7% from 24.5%. 

The report said the communication suggests that the RBI is unlikely to consider any rate hikes during FY27, with inflation expected to remain benign at around 5% and core inflation projected at 4.3%. 

RBI upgrades growth, lowers inflation forecast 

The central bank revised its FY27 real GDP growth forecast to 6.7% from 6.6%, with quarterly projections of 7.0% for Q1, 6.4% for Q2, 6.5% for Q3 and 6.8% for Q4. 

The report said domestic demand remains resilient, supported by robust private consumption and steady investment activity, although risks persist from elevated energy prices, global supply chain disruptions and weather-related uncertainties linked to El Niño conditions. 

On inflation, the RBI lowered its FY27 CPI forecast to 5.0% from 5.1% while reducing its core inflation estimate by 40 basis points to 4.3%. Quarterly inflation projections stand at 4.7% for Q2, 5.9% for Q3, and 5.5% for Q4. 

RBI announces regulatory reforms 

Alongside the policy decision, the RBI unveiled several regulatory measures aimed at strengthening the banking system. The central bank proposed harmonising the framework governing interest rates on advances across regulated entities. The move seeks to standardise loan pricing across the existing Prime Lending Rate, Base Rate, MCLR, and External Benchmark Lending Rate (EBLR) regimes to improve transparency, strengthen monetary policy transmission and enhance consumer protection. Currently, around 67.6% of bank loans are linked to the EBLR framework. 

The RBI also proposed resuming licensing of Urban Co-operative Banks (UCBs) under an "on-tap" framework. The report noted that India had around 1,457 UCBs as of March 2025, accounting for nearly 2% of banking system deposits. Licensing of new UCBs has remained suspended since 2004. 

According to the report, the move is expected to improve financial inclusion while encouraging fresh capital, innovation and stronger governance standards in the cooperative banking sector. 

The RBI further announced revised guidelines for concentration risk management in Rural Co-operative Banks (RCBs), reflecting the sector's growing importance. The share of RCBs in the cooperative sector's total assets increased from 66.9% in March 2020 to 71.2% in March 2024. The revised framework aims to address concentration risks arising from their relatively narrow sectoral and geographical lending base. 

RBI reiterates focus on forex stability 

The report also highlighted the RBI's comments on exchange rate management, noting that the central bank reiterated its commitment to preventing self-fulfilling speculative movements in the foreign exchange market. 

Strong inflows of $36.7 billion under Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits up to July 31 have helped rebuild the foreign currency asset component of forex reserves by around $20 billion while reducing short-term forward liabilities by nearly $13 billion through June-end. 

Deposit growth remains resilient despite lower real rates 

SBICAPS also challenged concerns that lower real interest rates could hurt deposit mobilisation. 

Following the cumulative 125 basis-point repo rate cuts between February 2025 and June 2026, the weighted average domestic term deposit rate on fresh deposits declined by 63 basis points, while rates on outstanding deposits fell by 51 basis points. 

Despite the decline in real interest rates, from 2.52% in January 2026 to 0.87% in June 2026, deposit growth accelerated from 12.3% to 13.3% during the same period, indicating that deposit mobilisation remained resilient even as real returns moderated. The report added that the banking sector continues to remain healthy, with improvements in capital adequacy, asset quality, and overall financial stability.