RBI holds rates at 5.25% as inflation hits 18-month high

The Reserve Bank of India held its benchmark interest rate at 5.25% on August 5, 2026, the fifth straight hold, as retail inflation climbed above its 4% medium-term target.

Economists polled by Reuters had correctly forecast the stance.

Several Asian central banks—including those in Japan, the Philippines, Indonesia, and South Korea—have raised rates to combat inflation stoked by higher energy prices from the Middle East conflict.

India’s consumer inflation hit an 18-month high of 4.38% in June 2026, driven by surging oil costs. Since May 2026, the government has partially passed on fuel price increases, adding to cost pressures.

The RBI has stressed it focuses on core inflation, which excludes energy and food. That gauge stood at 3.7% at the end of April 2026 and is expected to reach 4.7% in the financial year ending March 2027.

Yet a prolonged rise in energy prices could lift core inflation through higher input, transportation, and operational costs.

HSBC Global Investment Research said in a report on August 3, 2026, that inflation is expected to stay above 5% for eight months starting October 2026. “That’s a level that will be difficult for both the RBI and markets to overlook,” it stated, adding it expects the central bank to raise rates by 25 basis points each in October and December 2026.

India, the world’s fastest-growing major economy, is highly vulnerable to supply disruptions from the Iran war, as it imports nearly 85% of its fuel. The Strait of Hormuz was a key supply route before the conflict.

The country also faces the risk of El Niño in 2026. Despite heavy rains causing recent flooding, it confronts the prospect of a deficient monsoon.

LSEG data show India’s current account and fiscal deficit widened in the quarter ended June 2026. Persistent capital outflows have made the rupee one of the worst-performing Asian currencies.