The Reserve Bank of India (RBI) kept its benchmark interest rate unchanged at 5.25% for the fifth consecutive meeting on Wednesday, a decision that aligned with market expectations, even as the country's retail inflation exceeded the central bank's medium-term target of 4%.

The RBI noted that headline inflation had "edged up slightly above the target level as expected," but added that core inflation, which excludes volatile items like precious metals, remained "moderate."

RBI Governor Shaktikanta Das stated in his address on Wednesday that core inflation is expected to gradually decline after peaking in the December quarter. Das also emphasized the need for a clearer assessment of the "trend and composition" of inflation before taking any policy action, adding that future rate adjustments must "consider the need to recalibrate the policy rate in response to evolving growth-inflation dynamics."

Several Asian nations, including Japan, the Philippines, Indonesia, and South Korea, have raised interest rates in recent months to curb inflation, driven by rising energy prices due to the Middle East conflict.

Das also warned that while economic growth remains "resilient," the pace of expansion is expected to slow this fiscal year. He described the growth outlook as "uncertain," citing multiple challenges from the southwest monsoon, the El Niño weather pattern, geopolitical tensions, and global trade policies.

India's consumer inflation surged to 4.38% in June, an 18-month high, fueled by rising oil prices. Since May, the government has passed on some of the increased fuel costs to consumers, further intensifying cost pressures.

However, the RBI has repeatedly stressed that its policy focus is on core inflation, which strips out volatile energy and food prices. Core inflation stood at 3.7% at the end of April and is projected to climb to 4.7% in the current fiscal year ending March 2027.

Das stated on Wednesday that the current inflation is primarily driven by fuel and food prices, with no signs of broad-based price pressures. However, persistent increases in energy prices could also push up core inflation by raising input, transportation, and operational costs.

In a report released on Monday, HSBC Global Investment Research predicted that India's inflation rate would remain above 5% for eight months starting from October. "This level will make it difficult for both the RBI and the market to ignore," HSBC stated, adding that it expects the central bank to raise interest rates by 25 basis points each in October and December.