By Pranoy Krishna
BENGALURU, July 27 (Reuters) - The Reserve Bank of India will keep its key interest rate unchanged at 5.25% in August and for the rest of the year, according to a Reuters poll of economists, as it assesses the impact of the Middle East war on the economy and price pressures.
That is a shift from a May Reuters poll, when economists had forecast a rate hike next quarter.
Although inflation rose to 4.38% in June, the first reading above the RBI's 4% target since January 2025, many economists
have scaled back expectations for an interest rate hike this year after Governor Sanjay Malhotra said it was "premature" to discuss raising them.
That outlook contrasts with some central banks in emerging and developed markets, which have begun raising borrowing costs to curb inflation and stem currency weakness. The same pressures are also affecting the Indian economy.
Nearly 95% of economists, 68 of 72, in the July 21-27 Reuters poll expected the Monetary Policy Committee to leave the repo rate unchanged at 5.25% at the conclusion of its August 3-5 meeting. Four expected a 25-basis-point hike.
The RBI lowered the rate by 25 basis points to 5.25% in December and has held it steady since then.
Although there was no clear consensus among economists on the policy outlook beyond that, poll medians showed interest rates remaining on hold at least until early 2027.
"We have already seen some of the effects of the war trickle down to inflation, but it will be too quick a reaction by the central bank to hike rates now because growth will be affected adversely, and the situation outside is too fickle to react in haste," said Aditya Vyas, chief economist at STCI Primary Dealer.
With many sectors still grappling with U.S. tariffs and now the repercussions of the Middle East war, economists said the RBI was unlikely to raise rates unless inflationary pressures became more persistent.
"While overall macro indicators are resilient, the more vulnerable sectors that have been exposed to both tariffs and (the Middle East) conflict have been hit hard," said Kanika Pasricha, chief economic adviser at the Union Bank of India.
Pasricha, however, cautioned if oil prices remained consistently above $90 a barrel, the RBI could consider raising rates in the second half of the fiscal year.
NO RATE HIKE TO DEFEND RUPEE
The RBI is also under pressure from a sharply weakening rupee, which is down nearly 7% against the dollar for the year.
At its June policy meeting, the central bank announced a series of measures to attract foreign capital and support the currency. While those measures have drawn nearly $20 billion in inflows, they have failed to stem the rupee's slide.
Despite the fall, economists said the RBI was unlikely to use interest rates to defend the rupee, as economic growth was forecast to slow to 6.6% this fiscal year from the 7.7% last year.
"I do not think the RBI will use interest rate tools to target the rupee because it is ineffective...they cannot simply discard the growth objective, and rate hikes are way more costly now at this particular juncture," said Apoorva Javadekar, chief economist at Muthoot Fincorp.
Javadekar said the RBI would consider raising rates only if inflation climbed above 6% and was expected to remain around that level on a sustained basis.
Poll medians showed inflation averaging 4.8% this fiscal year, up from 4.7% predicted in the May Reuters survey but below the RBI's projection of 5.1%.
(Other stories from the Reuters global economic poll)
(Reporting by Pranoy Krishna; Polling by Renusri K and Susobhan Sarkar; Editing by Vivek Mishra, Ross Finley and Raju Gopalakrishnan)
