RBI Holds Repo Rate at 5.25%, Unveils Lending Rate Overhaul and UCB Licensing Resumption

The Reserve Bank of India (RBI) on Wednesday held the repo rate at 5.25% in its fourth straight policy meeting, retaining a neutral stance as it waits for greater clarity on inflation and growth. The six-member Monetary Policy Committee (MPC) raised the FY27 gross domestic product (GDP) growth forecast to 6.7% from 6.6%, citing resilient domestic activity and better-than-expected first-quarter performance. The inflation projection for the year was trimmed to 5% from 5.1%.

RBI Governor Sanjay Malhotra said there was a "need for greater clarity to emerge, especially regarding inflation, its path and composition, before taking any policy action." He added that the central bank is neither taking a "dovish" view nor believes the current policy rate is inappropriate for the projected outlook, but cautioned that uncertainty remains high.

**Regulatory Overhaul Targets Lending Rates**

The central bank announced a broad proposal to harmonise and standardise the regulatory framework governing interest rates on advances for all regulated entities, including banks, finance companies, and housing finance companies. Malhotra said the measure aims to enhance transparency in lending rates and strengthen consumer protection.

The proposed changes will address operational issues in the current lending rate framework, particularly concerning the Marginal Cost of Funds-based Lending Rate (MCLR) and the External Benchmark Lending Rate (EBLR). The RBI plans to standardise market practices related to interest charging, including the day count convention and benchmark reset dates, where divergent practices currently exist. "These measures are designed to promote greater uniformity and transparency to loan pricing, improve monetary transmission and strengthen consumer protection," Malhotra said.

The RBI will release draft directions for public comment before finalising the framework. The governor noted that the proposal is principle-based and aims to align guidelines across different categories of regulated entities while remaining proportionate to their nature and size.

**Cooperative Banking Sector Gets Boost**

The RBI said it will resume issuing new licences to urban cooperative banks (UCBs) after a pause of more than two decades. The licensing was put on hold in 2004 after a large number of newly licensed UCBs became financially unsound within a short period. The central bank had first signalled the possibility of resuming licences in its monetary policy statement on October 1, 2025, noting that the operating environment and the UCB sector had transformed substantially since 2004.

"On the basis of the feedback received on the discussion paper on licensing of UCBs, we are issuing draft guidelines for resuming licensing of UCBs," Malhotra said. As of March 31, 2025, India had 1,457 UCBs, the largest cohort of banks by number regulated by the RBI. Between 1993 and 2001, the central bank had issued 823 UCB licences.

Separately, the RBI announced a comprehensive review of the credit monitoring arrangement for rural cooperative banks. The existing arrangement was last revised in 2008. The RBI said the review takes into account experience gained and developments in the banking sector since then, and aims to update the framework in line with changes over the past 18 years.

**Growth, Inflation, and External Risks**

The MPC's decision to hold rates and maintain a neutral stance reflects the central bank's balancing act between supporting growth and containing inflation. Governor Malhotra said the "overall economy has become very resilient" and that "underlying inflation pressures are muted." Deputy Governor Poonam Gupta added that the resilience extends across sectors, particularly agriculture and the rural economy.

On the external front, Malhotra said global economic conditions and sentiment remain hostage to rapidly changing developments in the West Asia conflict, which has adversely affected India's domestic growth and inflation outlook. However, stronger macroeconomic fundamentals are helping the economy navigate the shock. He said the situation presents an opportunity to accelerate measures to enhance resilience against external shocks.

Addressing foreign currency inflows, Malhotra said India attracted nearly $36 billion under the "at par" FCNR deposit swap window, which is expected to strengthen the country's external position. He ruled out specific measures to absorb surplus liquidity from such swaps, stating the rupee liquidity arising from them would be short-term and absorbed through normal economic needs.

On the rupee, Malhotra said that while uncertainty remains elevated, "it is quite possible, going forward, as tensions and the conflict de-escalate, that it strengthens further."

The next MPC meeting is scheduled for October 5-7.