The Reserve Bank of India has signalled a more challenging macroeconomic landscape ahead, lowering its growth forecast and sharply raising its inflation projection for FY27 amid escalating geopolitical tensions in West Asia and weather-related risks.
While the Monetary Policy Committee (MPC) kept the repo rate unchanged and retained its neutral stance on Friday, economists believe the central bank may be forced to raise rates in the second half of the fiscal year if inflationary pressures persist.
The RBI revised its real GDP growth forecast for FY27 to 6.6 per cent from 6.9 per cent projected in April, while raising its consumer price inflation estimate to 5.1 per cent from 4.6 per cent earlier, reflecting mounting concerns over supply disruptions and food price risks.
“The MPC was of the opinion that there are considerable risks to the baseline assessment of inflation and growth due to uncertainty about the duration and intensity of the conflict (in West Asia), the magnitude of spillover effects and the pace of restoration of supply chains. Additionally, the food outlook remains uncertain on account of the sub-normal southwest monsoon forecast and El Niño conditions,” RBI governor Sanjay Malhotra said.
Explaining the decision to leave rates unchanged, Malhotra said the committee considered it prudent to wait for greater clarity on evolving risks while remaining data-dependent and closely monitoring whether supply-side pressures begin to feed into broader price levels. The policy pause, however, has done little to temper expectations of tighter monetary policy later in the year.
“RBI expectedly kept the rate and stance unchanged, while highlighting the amplified risks on the inflation front. We expect a 50 basis point rate hike beginning October,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
Aditi Nayar, chief economist at Icra, said the trajectory of monsoon rains, their impact on agricultural output and inflation, and any signs of broader inflationary pressures would determine the timing of the next policy move. “As of now, we cannot rule out a rate hike in Q3 FY27,” she said.
Indranil Pan, chief economist at Yes Bank, said the central bank had bought itself time to assess the evolving growth-inflation dynamics rather than reacting immediately to the higher inflation forecast. “Having said that, all policy options remain open as the RBI assesses risks to the inflation trajectory alongside second-round effects through inflation expectations surveys before deciding on rate hikes,” Pan said.
“Interestingly, the governor’s shift in language — from ensuring “proactive and sufficient” liquidity to maintaining “appropriate” liquidity — reinforces the overall hawkish undertone in the June monetary policy,” said Siddhartha Sanyal, chief economist and head of research, Bandhan Bank.