While the Reserve Bank of India (RBI) held the policy repo rate steady for a third straight meeting, it raised its inflation forecast for FY27 by 50 basis points to 5.1%. However, most economists still anticipate the central bank will begin tightening in the second half of the year.
Sakshi Gupta, principal economist, HDFC Bank, said policy could be assessed as slightly hawkish given the 50bps upward revision in the inflation forecast to 5.1% for FY27. “This raises the likelihood of the rate hike cycle beginning by the October policy. We estimate a cumulative 50bps rate increase in FY27.” She added that the central bank recognised the downside risks to growth due to supply chain disruptions and increase in price pressures.
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Projections for inflation are 4.2% in Q1, 5.1% in Q2, 5.9% in Q3, and 5.4% in Q4. These forecasts are subject to upside risks due to global supply chain disruptions, global commodity price shocks, uncertainty about the spatial and temporal distribution of the south-west monsoon and El Niño conditions, Sanjay Malhotra said in the statement.
Baseline Projections
Economists argue that the inflation forecasts remain within the RBI’s target range and do not justify an immediate rate increase. They also say the central bank’s foreign-exchange measures should bolster the rupee going forward, reducing the need for a near-term hike from a currency perspective. They believe the RBI will monitor inflation prints closely before any decision on a potential rate hike.
According to Barclays, the RBI is expected to hold in 2026 and to hike 50 bps in CY2027. “The MPC is data-dependent and will approach each policy as it comes. In our view, the actual inflation outcomes have to be within the RBI’s estimate to give it the comfort that inflation pressures are not generalising.”
Growing Consensus
However, some economists have voted for a 25-bps rate hike in the August meeting. Gaurav Kapur, chief economist at IndusInd Bank, said that the 50-bps upward revision in the baseline CPI inflation forecast with risks seen on the upside, has strengthened the case for a rate hike in the next meeting. He added that the real repo rate based on the revised inflation forecast is now well below the real neutral policy rate, indicating that monetary tightening will have to be pursued in a calibrated manner going forward.
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Anitha Rangan, chief economist at RBL Bank, said that considering serious upside risks to inflation from El-Nino and second order impact from the West Asia war, the RBI will have to hike sooner than later. “We continue to pencil in 100 bp of hike, and a faster hike may be needed from August policy onwards.”
TOPICSRBIThis article was first uploaded on June six, twenty twenty-six, at twenty-one minutes past twelve in the am. © The Indian Express (P) Ltd