The Reserve Bank’s move to raise its inflation forecast signals the possibility of one to two rate hikes in the coming months, opined experts after the central bank left the policy rate and stance unchanged on Friday.
The Reserve Bank of India (RBI) kept its benchmark repo rate unchanged at 5.25 per cent, as expected, and announced a raft of measures to attract foreign capital and support the rupee amid growing risks to growth and inflation from the prolonged West Asia conflict, elevated energy prices and global supply chain disruptions.
To support the rupee, the measures included scrapping taxes on interest income and capital gains for eligible foreign investors in government securities, offering concessional terms for foreign-currency deposits from non-resident Indians and subsidising hedging costs for select offshore borrowings.
The Monetary Policy Committee (MPC) unanimously voted to leave the policy repo rate unchanged at 5.25 per cent and to continue its “neutral” stance. The central bank projected the retail inflation for 2026-27 at 5.1 per cent, higher from its earlier estimate of 4.6 per cent, largely due to mounting input costs, triggered by the pass-through of higher global energy prices to retail rates of petrol and diesel.
Madan Sabnavis, Chief Economist, Bank of Baroda, said that while the MPC has kept the repo rate and stance unchanged as per expectations, going by the forecasts made on inflation, it does look like that there would be rate hikes in the coming months as inflation rises. “We are looking at 1 to 2 hikes this year. It does look like that there is a monsoon impact which has been buffered here,” he added.
Sabnavis further said that the positive surprise has been the rather aggressive and comprehensive steps taken to get forex through FPI, ECB and FCNR (B) deposits.
Industry body Assocham said the calibrated step to keep the policy rate unchanged will give a big strength to business sentiments and strengthen economic growth. “We expect economic growth to remain strong this financial year too, despite the uncertain global economic environment and West Asia war winds, said Saurabh Sanyal, Secretary General, Assocham.
The RBI has prioritised supportive domestic financial conditions for growth right now, Deloitte India Economist Rumki Majumdar said. Instead, she said, the RBI probably will use a wider toolkit, such as liquidity operations, forex intervention and policy communication, to manage inflation and currency volatility.
Devendra Kumar Pant, Chief Economist, India Ratings & Research, said the economy is facing headwinds of disruption in the supply chain, elevated energy prices and deficient rainfall due to El Nino. The biggest unknown for the economy is the duration of the war and the time taken for supply normalisation.
“Ind-Ra’s base case is a hold on policy rates even in the next monetary policy (August 2026). This is driven primarily by a decline in inflation from 4QFY27. However, if the monsoon rainfall deviation from normal is more than 10 per cent and the war continues for a longer period and oil prices remain higher, one may expect RBI to take policy action even before the scheduled MPC meeting,” Kumar said.
Ranen Banerjee, Partner and Leader, Economic Advisory, PwC India, said that rate action was not warranted, given that inflation is still within the targeted range. The RBI is signalling that there are strong headwinds, and is possibly landing the message in tranches that, in the event the Middle East conflict drags on, there would be a significant downside to growth, he said.
“If the inflation prints come in close to these projections and the upward risks continue, then the MPC could change its stance in the next meeting and press the rate increase button in its December meeting,” Banerjee said.
Dipti Deshpande, Principal Economist, Crisil, said with a data-driven approach, the MPC is keenly watching risks on inflation and growth, which are yet to materialise meaningfully. “The MPC will balance its inflation mandate with growth, where downside risks are also deepening with prolonging of the conflict. In the milieu, we expect the MPC to keep rates unchanged this fiscal,” she added.
Also read: RBI lowers GDP growth forecast to 6.6 pc
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