Stories
RBI Policy Preview: Hold Rates, Drain Liquidity, Signal Intent First
- •India's Q1FY27 GDP grew 7.8%, but growth risks intensify due to US-Iran talks, monsoon, and fading GST lift, expecting a slowdown to 6-6.5% in H2.
- •Underlying inflation (CPI excluding food, fuel, precious metals) rose to 2.9% in August 2026, still below RBI's 4% target, but risks are tilted to the upside from weak monsoon and elevated energy prices.
- •FCNR(B) inflows created a large banking system liquidity surplus, pushing overnight rates below the SDF rate, though RBI actions have helped recover them slightly.
- •Analysts recommend holding rates, draining excess liquidity, and shifting the monetary policy stance from neutral to a tightening bias to improve transmission and signal inflation priority.
- •Despite the recommendation, a 25 basis point repo rate hike is predicted as the path of least resistance for RBI, influenced by global central bank actions and INR pressure.
Key Questions Answered
India's growth is expected to slow down to 6-6.5 percent YoY in H2 FY27 due to intensifying risks such as US-Iran talks deadlock affecting energy supplies, a disappointing monsoon, and fading momentum from GST rationalisation. Meanwhile, inflation risks are tilted upward due to weak monsoon threats on crop yields, poor reservoir levels affecting rabi output, and elevated energy prices.
Banking system liquidity surged into a large surplus due to FCNR(B) inflows amounting to US$133 billion, which drove overnight rates below the policy floor and the 5 percent standing deposit facility rate during the first half of September 2026.
While experts prefer a status quo on rates alongside a shift in stance from neutral to a tightening bias to drain excess liquidity and signal intent, they predict that a 25 basis point hike in the policy repo rate and potential G-sec sales will be the path of least resistance due to global central bank hikes and pressure on the rupee.
