Will the Reserve Bank of India (RBI) hike or pause repo rate? Markets are keenly awaiting the policy decision by the Monetary Policy Committee tomorrow, on June 5, amid a depreciating rupee and rising inflation risk.
Most of the economists are expecting a cautious approach by the RBI in the current context.
HSBC believes that the decision remains a “close call”, but current inflation levels give the central bank enough room to stay on hold for now. Economists at Bank Julius Baer also noted that India’s widening trade deficit, rising oil prices and continued pressure on the rupee are increasing the risk of a future interest rate hike by the RBI but “they could stay on hold this time.”.
Rate hikes likely from fourth quarter
However, HSBC expects the RBI to announce an FX package along with rate hikes later this year, as rising energy costs and a possible El Nino weather event could significantly increase price pressures in the coming months.
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They forecast a total of 50 basis points (BPS) of rate hikes beginning in the fourth quarter of 2026.
The brokerage is also expecting upward revisions in RBI’s FY27 inflation forecast if it adopts an oil price assumption of $95 per barrel.
However, HSBC believes the central bank may prefer to wait for clearer signs of inflationary pressures before tightening policy.
HSBC sees inflation rising above 6% in FY27
As a result, HSBC expects India’s retail inflation to average 5.6% in FY27 and India’s economy to grow 6% in FY27.
The report also projects inflation to remain above 6%, higher than the RBI’s safe zone, for two to three quarters starting September 2026.
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The brokerage estimates that higher oil prices could add 1.3 percentage points to inflation, while weather-related disruptions could contribute another 0.3 percentage points.
Growth concerns may limit tightening: HSBC
However, HSBC said slower economic growth could limit how aggressively the RBI raises rates, even if inflation rises further.
The brokerage also noted that liquidity conditions have already started tightening due to foreign exchange interventions and higher currency circulation, reducing the need for immediate policy action.
RBI may unveil package to support the rupee: HSBC
HSBC expects authorities to announce an FX package and implement rate hikes later this year, although the timing remains uncertain.
The brokerage said the timing of any package could depend on global oil prices and the extent of pressure on the rupee.
“Either way, it is not necessary for a package to be announced during the RBI’s policy meeting,” HSBC said.
The report noted that the Indian rupee has underperformed most Asian currencies over the past year, increasing expectations of policy measures to support the currency.
HSBC estimates India may need between $30 billion and $70 billion in additional support through a combination of lower current account deficits and higher capital inflows.
Hawkish signals in focus: Bank Julius Baer
“While most economists expect the RBI to stay on hold at its 3-5 June meeting, the market will be looking out for hawkish signals to assess rate hike prospects,” Bank Julius Baer economists stated as state-run fuel retailers raised petrol and diesel prices four times in May, adding to inflationary pressures and GDP is expected at 6.9% lower from 7.6% a year ago.
“These projections face downside risks as the Middle East conflict drags on,” Bank Julius Baer said.
Conclusion
The RBI was on a rate-cut cycle last year, reducing the repo rate by 100 basis points during FY26. In its first policy meeting of FY27 in April, the central bank decided to pause, keeping the repo rate unchanged at 5.25%. At the time, the Iran-US conflict had only recently escalated after tensions intensified in late February. More than two months later, the RBI is widely expected to remain on pause again, despite a surge in oil prices that has pushed up fuel costs.
TOPICSinflationRBIRBI Monetary Policy ReviewReserve Bank of IndiaThis article was first uploaded on June four, twenty twenty-six, at sixteen minutes past one in the afternoon. © IE Online Media Services (P) Ltd