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The Reserve Bank of India (RBI) is widely expected to keep the benchmark policy rate unchanged at 5.25 per cent at its monetary policy review this week, with economists anticipating a cautious approach amid concerns over inflation and growth risks arising from the ongoing tensions in West Asia.

With crude oil prices climbing, supply chain disruptions persisting, and the rupee remaining under pressure due to global developments, several analysts believe the central bank may revise its inflation projections upward while trimming its GDP growth forecast during the bi-monthly policy meeting scheduled from June 3 to 5.  The six-member Monetary Policy Committee (MPC), chaired by RBI Governor Sanjay Malhotra, will announce its policy decision on June 5 following three days of deliberations.

In April, the RBI had opted to keep the repo rate unchanged, choosing a wait-and-watch strategy as policymakers assessed the impact of the West Asia conflict on energy markets, inflation trends, and economic growth. A research report by the State Bank of India's economic research department expects the central bank to maintain the status quo in June amid an increasingly uncertain global environment.

Based on current growth and inflation trends, the report suggests that consumer price inflation could remain above 5 per cent for the next three quarters, although inflation for the current quarter is projected at around 4 to 4.1 per cent. The report also forecasts real GDP growth of approximately 7.2 per cent in the fourth quarter of FY26 and an overall growth rate of 7.5 per cent for the financial year.

"Our nowcast for FY2027 GDP growth stands at 6.6 per cent. However, given the persistence of geopolitical uncertainties, these projections may be revised as additional data becomes available," the report noted. It further stated that its policy expectation remains a "hold on rates" approach, with future decisions remaining data-dependent. The report added that an inflation-targeting central bank can utilise tools such as Operation Twist to address market conditions without necessarily changing interest rates.

The SBI report also highlighted the need for the MPC to discuss whether exchange rate management should play a larger role in policy considerations beyond the existing inflation-targeting framework. Bank of Baroda Chief Economist Madan Sabnavis similarly expects no changes to either the repo rate or policy stance in the upcoming review. "However, the overall tone is likely to remain cautious and somewhat hawkish. We expect the RBI to raise its inflation forecast closer to 5 per cent and lower its GDP growth projection to around 6.5 per cent from the earlier estimate of 6.9 per cent," he said.

Sabnavis added that while specific foreign exchange measures are unlikely, the RBI may offer greater clarity on recent currency market developments.
In its annual report released on Friday, the RBI said it plans to strengthen and refine its GDP growth and inflation forecasting framework during the current financial year. The central bank reiterated that India's economic outlook for 2026-27 remains favourable, supported by strong macroeconomic fundamentals, though a prolonged conflict in West Asia could pose downside risks to growth.

The report noted that inflation is expected to remain broadly aligned with the target in 2026-27 due to adequate foodgrain inventories, healthy reservoir levels, and stable agricultural conditions, despite concerns related to possible El Nino effects and above-normal temperatures. At the same time, it warned that inflation risks could intensify if geopolitical tensions trigger a sharp rise in global fuel and commodity prices.

The government has mandated the RBI to maintain headline retail inflation at 4 per cent, with a tolerance band of 2 to 6 per cent. Commenting on the upcoming policy review, Crisil Principal Economist Dipti Deshpande said the RBI is expected to keep the repo rate unchanged and continue with a neutral policy stance.

"Current inflationary pressures are largely supply-driven, arising from elevated fuel prices, higher input costs, and currency weakness. Therefore, the MPC may choose to look through these temporary supply-side shocks while evaluating monetary policy," she said.

Deshpande observed that prolonged disruptions around the Strait of Hormuz have increased upside risks to inflation and that policymakers are likely to closely monitor how higher global energy prices transmit into domestic inflation.

She also said the MPC would keep a close watch on evolving El Nino conditions and their potential impact on the monsoon and food inflation outlook.
ICRA Chief Economist Aditi Nayar echoed similar concerns, noting that uncertainty surrounding the monsoon outlook and the fragile ceasefire situation in West Asia are likely to reinforce the MPC's cautious stance.

 

Also read: Crude oil prices drop to $91 a barrel

The India Meteorological Department (IMD) has forecast below-normal southwest monsoon rainfall during the June-September season, estimating precipitation at 90 per cent of the long-period average with a margin of error of 4 per cent.

Vinay Pai, Managing Director and Head of Fixed Income at Equirus Capital, said financial markets are currently factoring in the possibility of a 25-50 basis point rate increase, although recent RBI actions indicate a preference for liquidity management and currency stabilisation rather than immediate monetary tightening.

"For the June policy, the RBI is expected to leave rates unchanged while potentially adopting more hawkish forward guidance. However, the official policy stance is likely to remain unchanged in the near term. Any rate hike would depend on sustained macroeconomic stress," Pai said.

He added that if crude oil prices remain above USD 100 per barrel for a prolonged period, inflationary pressures could compel the central bank to consider a cumulative 50-basis-point increase by August, although this is not the base-case scenario currently

The RBI had reduced policy rates by a cumulative 100 basis points during 2025-26. India's retail inflation, measured by the Consumer Price Index (CPI), edged up to 3.48 per cent in April, driven largely by higher prices of gold and silver jewellery along with increases in certain food items.