At its third meeting of FY27, and in line with expectations, the RBI’s Monetary Policy Committee (MPC) left the repo rate unchanged at 5.25%. Accordingly, the SDF and MSF rates were retained at 5.00% and 5.50%, respectively. In addition, the MPC unanimously voted to retain the ‘neutral’ policy stance. The repo rate has now been on hold for the fourth consecutive review since the 25-bps cut in Dec-25, while the ‘neutral’ stance has been in place since Jun-25.

 

RBI’s macroeconomic projections

The forecast for FY27 GDP growth was marked up by 10 bps to 6.7%.

• The growth forecast for Q1 FY27 was revised sharply higher by 40 bps to 7.0%, while that for Q2 FY27 was raised by 10 bps to 6.4%.
• Projections for Q3 and Q4 FY27 were left unchanged at 6.5% and 6.8%, respectively.

 

On the other hand, the CPI inflation trajectory for FY27 was revised modestly lower by 10 bps to 5.0%.

• Realised Q1 FY27 CPI inflation at 3.9% undershot the RBI’s projection by 30 bps, creating room for the downward revision.
• The forecast for Q2 FY27 was pared by 40 bps to 4.7% and Q3 FY27 was retained at 5.9%, while Q4 FY27 was marked up marginally by 10 bps to 5.5%.
• The FY27 core CPI inflation forecast (CPI excluding food and fuel items) was revised lower by 40 bps to 4.3%.

 

Importantly, the RBI now assesses the balance of risks around both its growth and inflation forecasts as neutral. This marks a shift from the Jun-26 review when downside risk was attached to the growth projection of 6.6% and upside risk to the inflation projection of 5.1%.

 

On the external front, the package of special targeted measures unveiled in Jun-26 to facilitate foreign exchange inflows has begun to deliver, restoring a measure of stability to the INR –

• India recorded cumulative inflows of USD 40.8 bn under the special windows as of 31 Jul-26. This makes us confident of realizing our assumption of cumulative inflow of USD 75 bn by Dec-26 (with the possibility of some upside).
• On this trajectory, the FY27 BoP could swing to a surplus of USD 70 bn, from a deficit of USD 24 bn in FY26.
• The resulting liquidity infusion will emerge as a key policy management challenge, with the core liquidity surplus likely to swell from Rs 5 tn in Jun-26 to nearly Rs 10 tn by Sep/Dec-26 – a build-up the RBI is likely to calibrate by deploying liquidity absorption tools to uphold the neutral stance.
• Critically, INR stability has removed the immediate compulsion for a defensive rate action, allowing the MPC to await incoming macroeconomic data.

 

 

Inferences and Outlook

The Aug-26 MPC had convened against a materially less adverse backdrop than in Jun-26. While the West Asia crisis remains unresolved, the extreme global macro risks have ebbed alongside a moderation in energy prices – the Indian crude basket has averaged ~USD 85 pb since Jun-26, against ~USD 109 pb over Mar-May-26. Domestic activity, meanwhile, has proved resilient.

• Leading and coincident indicators for Q1 FY27 – PMIs, core industries’ output, IIP, passenger vehicle sales and merchandise exports – have held up encouragingly despite a highly adverse geopolitical backdrop.
• This assessment is corroborated by corporate results, which so far point to an improvement in revenue growth across most sectors, although commodity and energy-facing sectors have seen some deterioration in margins.
• Together, the Q1 momentum allays concerns over the prospects for FY27 growth and curtails the downside risks flagged in Jun-26.

 

While that is encouraging, we believe the inflation risks embedded in the RBI’s projections could be somewhat understated. We retain our FY27 CPI inflation estimate at 5.1%, marginally above the RBI’s 5.0%.

• The south-west monsoon is progressing broadly in line with the IMD’s forecast of a 10% cumulative seasonal deficit. However, rainfall volatility and uneven geographical distribution persist, while the El Nino risk is yet to play out fully for the season. This could impart weakness to the kharif output, which in turn could provide firmness to food prices.
• Although the near-term impulse remains dominated by the non-core drivers of food and fuel, core inflation is expected to drift gradually higher, with the transmission from Core WPI to Core CPI typically operating with a lag of about two quarters.
• Core inflation is also likely to remain sticky thereafter, considering the impending 8th Pay Commission payouts by the central and state governments over FY28 and FY29.
• By the RBI’s own estimates, the CPI trajectory stays above 5.0% through Q3 FY27–Q1 FY28, with the peak likely in Q3 FY27.

 

Accordingly, we retain our call of a cumulative 25–50 bps repo rate hike in H2 FY27. The rate action could be backloaded, contingent upon the uneven monsoon outturn, the fluid and volatile geopolitical environment, and a potentially higher US interest rate trajectory. This would create space for a shallow tightening episode.

 

Bond market outlook

The focus on stabilising the INR has clearly offered respite to g-secs. The immediate impact of the inflows under the special regulatory windows will be felt in money market liquidity conditions and should support yields in the near term. Beyond that, an upward-drifting CPI trajectory, the anticipated commencement of a backloaded rate hike cycle in H2 FY27, and the spectre of fiscal uncertainty – on account of rising state commitments on cash transfers and the impending 8th Pay Commission award by both the central and state governments – are likely to push yields higher. Accordingly, while we expect the 10Y g-sec yield to remain anchored around 6.75% in the near term, we see it drifting higher towards 7.25% by Mar-27.