HSBC Research predicts the Reserve Bank of India will increase the repo rate by a total of 50 basis points to 5.75% in fiscal year 2027. This forecast is driven by concerns that inflation will remain above 5% and the need to manage excess system liquidity. The firm also estimates that India's GDP growth will moderate to 7.2% for the full year.
HSBC Global Investment Research has updated its outlook on India's monetary policy, projecting a series of interest rate hikes by the Reserve Bank of India (RBI) throughout fiscal year 2027. The firm anticipates the central bank will implement a 50 basis point increase, potentially pushing the benchmark repo rate to 5.75% by the end of the fiscal year. A basis point is one-hundredth of a percentage point, commonly used to measure changes in interest rates.
This projection is primarily based on persistent inflation concerns. Analysts expect headline inflation to stay above the 5% mark for the next nine months. Factors contributing to this pressure include volatile energy costs and potential agricultural disruptions, such as those linked to El Niño weather patterns. The central bank typically raises interest rates to control inflation by cooling demand, though this often comes with a trade-off for economic expansion.
Beyond interest rates, the report highlights the challenge of managing excess cash in the banking system. The firm estimates that approximately ₹5 trillion to ₹6 trillion remains as surplus liquidity, partly resulting from FCNR(B) deposits. To manage this, the RBI may rely on durable tools like open market operation sales to withdraw surplus cash. Efficient liquidity management is considered essential to ensure that changes in interest rates are effectively felt across the wider economy.
On the growth front, the economy is showing signs of cooling after a strong start. While the June quarter saw expansion of 7.8%, supported by high government capital spending, HSBC projects full-year growth to settle at 7.2%. This moderation is expected due to a high base effect from previous years and a projected slowdown in government stimulus. Furthermore, external factors are creating additional pressure. The current account deficit is anticipated to widen to 1.3% of GDP, influenced by high global oil prices and increased imports of essential goods. Fiscal pressures also remain a factor, with the deficit potentially exceeding budget estimates due to ongoing energy subsidy measures. Investors will now closely track the RBI’s upcoming policy meetings and data releases on consumer price inflation to see if these projections align with the central bank’s own assessment.