RBI to Keep Repo at 5.25% on Food, Fuel Watch: BofA

The Reserve Bank of India will hold the repo rate at 5.25% through its next several meetings, BofA Securities said in a note on the June MPC minutes. The US-Iran peace agreement has reduced one source of geopolitical uncertainty. The central bank is watching how food and fuel prices feed through to broader inflation before it moves.

BofA's call rests on two observations from the minutes. First, the MPC's language on food inflation softened relative to earlier statements, suggesting the committee sees some relief on the horizon. Second, the external members who had pushed for a cut in prior meetings did not repeat that demand in June. BofA reads that as a signal that the internal consensus for a hold is firming.

The risk to that view is fuel pass-through. Crude oil has stayed below $70 a barrel since the US-Iran deal. Domestic retail fuel prices have not fully adjusted downward in some states. If state-level taxes or distribution margins keep pump prices elevated, the inflation print could stay sticky even with lower global crude. BofA flagged that as the variable that could shift the timeline.

Food inflation, which ran above 8% for most of the first half of the year, has shown early signs of cooling. The monsoon has been above normal in the key growing regions. The government's buffer stocks of wheat and rice are comfortable. BofA expects the food component to moderate through the second half of the fiscal year, which would give the MPC room to hold without tightening rhetoric.

The repo rate has been at 5.25% since the April review, when the MPC voted 4-2 to hold. The two dissenting votes came from external members who argued that real rates were too high given the output gap. Neither repeated that argument in the June minutes. BofA attributed that to the improved external environment and the stabilisation of the rupee.

The rupee has traded in a narrow band against the dollar since the US-Iran agreement removed the risk of a Hormuz disruption. That stability has reduced the need for the RBI to use its forex reserves to defend the currency, which in turn takes pressure off domestic liquidity. BofA said the combination of a stable rupee and lower crude prices gives the MPC more time to assess the inflation trajectory. (Read more: India's LPG Supply Still Depends on Hormuz Chokepoint)

The next MPC meeting is scheduled for August 6-8. Markets are pricing a 95% probability of a hold, according to the overnight indexed swap curve. A cut is not fully priced until the December meeting.

BofA's note did not change its year-end forecast for the repo rate. It continues to expect the first cut in the fourth quarter of 2025, assuming food inflation continues to moderate and global crude stays below $70.