RBI Holds Repo Rate at 5.25% as Inflation Nears 5% – Risks of Zero Real Rate

The RBI has kept the repo rate at 5.25% despite consumer‑price inflation rising to 4.82% in August 2026. With inflation expectations moving close to the policy rate, the real policy rate is edging toward zero, creating a delicate policy dilemma. Key Developments Headline inflation at 4.82% (above the 4% target) and food inflation at 5.95% in August 2026. Core inflation rose to around 4.2% , indicating broader price pressures. Bank credit grew 19.1% YoY while deposits surged 17.8% YoY , the fastest in a decade. External shocks – higher Brent crude (> $100/barrel) and a weaker rupee – add to inflation risk. Important Facts The inflation expectations are now close to the repo rate , making the real policy rate effectively zero. The one‑year OIS rate sits around 6% , signalling market anticipation of future tightening. Deposit growth is partly driven by the FCNR(B) mobilisation scheme , not just domestic savings. The credit‑deposit ratio was about 80.3% at the end of August, showing banks are extending credit faster than deposits are rising. Historically, periods of high inflation (2010‑2013) saw real returns on savings turn negative, prompting households to shift to gold and other inflation hedges. The correlation between gold imports and inflation expectations was estimated at 0.83, underscoring the behavioural response to eroding real returns. UPSC Relevance Understanding the interaction between real policy rates , inflation expectations, and credit growth is essential for GS‑3 (Economy) questions on monetary policy. The article illustrates how external shocks (oil price spikes, currency depreciation) can feed domestic inflation, a topic often asked in the context of global linkages. The dynamics of deposit mobilisation and the credit‑deposit ratio also relate to banking sector health, a frequent GS‑3 sub‑theme. Way Forward Given the narrowing real rate cushion, a timely 25‑basis‑point increase in the repo rate could pre‑empt a deeper inflation‑expectations build‑up. Delaying a larger hike may cost more in terms of credibility and could force a sharper correction later. Policymakers must balance the need to curb inflation with the risk of slowing an economy that is growing at 7.8% and witnessing robust credit expansion. Monitoring external oil price shocks and the trajectory of core inflation will be crucial for future decisions.