RBI likely to maintain status quo in June, hike rates twice in FY27: Economists

The Reserve Bank of India (RBI) is likely to keep the benchmark repo rate unchanged in the June monetary policy review, according to a PTI poll of economists and treasury heads. Most of the respondents expect the Central Bank to resume policy tightening later in FY27 amid mounting inflation risks.

Of the respondents surveyed, 11 expect the Monetary Policy Committee (MPC) to maintain the status quo on rates in the upcoming policy to be announced on Friday, while four foresee a 0.25 per cent hike.

“Pause because headline inflation remains below the 4 per cent target. The RBI has policy space to wait to see the second round impact on inflation from the fuel price hike. Flexible inflation target provides policy space to look through the first round impact of supply side shocks,” said Gaura Sengupta, economist at IDFC First Bank.

The MPC will meet between June 3 and June 5 to decide on the policy rates. The Central Bank has reduced the repo rate by 1.25 per cent since last year to aid growth. Economists attributed the likelihood of a near-term pause to the RBI’s preference to assess the impact of recent fuel price increases and geopolitical developments before taking further policy action.

Despite expectations of a pause in June, the majority of respondents see the policy rate moving higher over the course of FY27. Most participants expect at least two rate hikes during the fiscal year, while some anticipate more than two increases if inflationary pressures intensify. Only a handful expect a single rate hike. “We now think the MPC is likely to begin hiking from the June meeting, as domestic inflation risks are rising, alongside higher global yields; a few Asian central banks have already delivered surprise hikes. Our FY27 rate hike forecasts face upside risk of 0.25-0.50 per cent if pressures on commodity prices, rupee sustain,” said Anubhuti Sahay, head, India economic research at Standard Chartered Bank, India.

The poll showed a broad consensus that the RBI is likely to revise its inflation projections upward in the upcoming policy review.

Most respondents expect FY27 consumer price inflation estimates to be raised to around 4.9-5.5 per cent, following the rise in global crude oil prices and the recent increase in domestic petrol and diesel prices.

ICRA chief economist Aditi Nayar said inflation could rise to around 5 per cent in June as higher fuel prices begin feeding into consumer prices, although the extent of second-round effects remains uncertain. Several respondents said the Central Bank may prefer to wait for greater clarity on whether the inflationary impact proves to be temporary or persistent.

Alongside higher inflation projections, many respondents expect the RBI to marginally lower its FY27 GDP growth forecast to reflect the risks posed by elevated energy prices and uncertainty stemming from geopolitical tensions in West Asia. While the expected revision to growth projections is seen as modest, economists believe higher input costs and weaker global demand conditions could weigh on economic activity if crude oil prices remain elevated for a prolonged period. On liquidity, most respondents do not expect any major measures in the June policy, though they said the RBI is likely to reiterate its commitment to maintaining adequate liquidity conditions in the banking system and ensuring money market rates remain aligned with the policy corridor.

Some respondents also expect the Central Bank to review administrative and regulatory measures related to the rupee and foreign exchange market, while maintaining its focus on orderly market conditions. Others believe no significant action may be required, given the expected boost to system liquidity from the RBI dividend transfer.

“We expect measures to support liquidity and to keep money market rates aligned to the corridor and review of admin and regulatory measures for the rupee,” said Sachchidanand Shukla, group chief economist at Larsen & Toubro.

RBI DATA

• Most of the respondents expect the Central Bank to resume policy tightening later in FY27 amid mounting inflation risks
• The RBI has policy space to wait to see the second round impact on inflation from the fuel price hike
• The MPC will meet between June 3 and June 5 to decide on the policy rates
• The Central Bank has reduced the repo rate by 1.25 per cent since last year to aid growth
• The poll showed a broad consensus that the RBI is likely to revise its inflation projections upward in the upcoming policy review