The Reserve Bank of India has kept its key lending rate unchanged at 5.25%, a decision that sets the country apart from neighbours like Indonesia and the Philippines who are tightening policy to fight rising prices.
This move, widely expected by economists, reflects a cautious approach. The central bank wants clearer evidence on whether higher oil prices are truly stoking broader inflation across Asia's third largest economy. For now, the six member rate panel voted unanimously to hold, keeping its stance at neutral.
Governor Sanjay Malhotra said headline inflation has moved above target mainly because of higher fuel costs, while broader price pressures remain in check. He reaffirmed the bank's resolute commitment to its inflation target, signalling no rush to act until there is greater clarity.
What does this mean for the Indian economy?
The decision gives breathing room to an economy that is showing mixed signals. Manufacturing activity has softened, with a key index slipping to a five year low. Yet credit demand remains robust, expanding at nearly 18%. The central bank nudged up its growth forecast to 6.7% from 6.6%, reflecting confidence in the economy's resilience.
Retail inflation rose above the medium term target of 4% for the first time in 17 months in June, but is projected to stay within the tolerance band of 2% to 6% for the current fiscal year. The bank cut its average inflation forecast to 5% from 5.1%, and core inflation is now seen at 4.3%, down from 4.7%.
Why is India bucking the regional trend?
Unlike its neighbours, India has not felt the same urgency to raise rates. A series of steps announced in June to boost capital inflows have already drawn more than $41 billion. These include a subsidised dollar deposit scheme for the Indian diaspora and incentives for banks and government companies to raise overseas borrowing.
Those inflows, along with lower oil prices and central bank dollar sales, have helped steady the rupee. The currency has recovered about 1% since June, though it remains down 5.4% for the year.
Governor Malhotra said the external balance of payments is on course to post a healthy surplus this year. He stressed the bank will continue to let the exchange rate be determined by market forces, while curbing excessive volatility and preventing disorderly movements.
What are the risks ahead?
Domestic demand remains resilient, but Malhotra pointed to a weak monsoon, trade tensions and geopolitical uncertainties as potential risks to growth. Some analysts, like Bhardwaj, still see scope for cumulative 50 basis points of rate hikes between now and the end of March.
For now, the message from Mumbai is clear: India is watching, waiting, and not rushing to follow its neighbours down the tightening path.
We will continue with our policy of it being determined by market forces, while curbing excessive volatility, checking speculative behaviour and preventing disorderly movements to ensure that it is not out of sync with fundamentals or disruptive of economic activity. RBI Governor Sanjay Malhotra
Frequently asked questions
Why did India hold interest rates when other countries are raising them?
India's central bank is waiting for clearer evidence on whether rising oil prices are fuelling broader inflation. It has also taken steps to boost capital inflows, which have stabilised the rupee and reduced the need for immediate action.
What is India's current inflation rate and target?
Retail inflation in June rose above the medium term target of 4% for the first time in 17 months. However, it is projected to stay within the tolerance band of 2% to 6% for the current fiscal year. The central bank forecasts average inflation at 5%.
How has the rupee performed recently?
The rupee has recovered about 1% since June, helped by capital inflows and lower oil prices. It remains down 5.4% for the year. The central bank says it will manage the exchange rate to prevent excessive volatility.