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RBI Holds Rates in June, Future Hikes Possible
The Reserve Bank of India (RBI) is anticipated to keep interest rates unchanged at its June meeting. This decision comes amid ongoing inflationary pressures driven by high global crude oil prices and geopolitical instability.
However, many economists believe the RBI may need to increase rates later in the year. This depends on whether crude oil prices and food inflation remain high. A survey of 11 economists suggests a strong chance of cumulative rate increases, between 25 and 50 basis points, by October or later in fiscal year 2027.
Inflation Concerns Drive Rate Forecasts
Economists now expect the RBI's policy repo rate to hit 5.75% by the end of FY27, up from the current 5.25%. While the June meeting is seen as a pause, the likelihood of a rate hike is predicted to rise significantly in upcoming meetings, from 10% in June to 25% by August and 67.5% by October.
Several factors are influencing these expectations. These include the prolonged conflict in West Asia, high crude oil prices, a weakening Indian rupee, and weather risks to food production. The average cost of the Indian crude oil basket was $107.96 per barrel in May, slightly down from $114.48 in April. However, the rupee has weakened significantly against the dollar, contributing to imported inflation.
Economic Activity and Inflation Outlook
Adding to these concerns, the government has increased fuel prices, which is expected to push up overall inflation. Analysts predict retail inflation could rise by up to 60 basis points in the coming months due to higher prices for fuel, milk, and gold. Upasna Bharadwaj from Kotak Mahindra Bank stated that "inflation risks are building up from higher input prices, energy costs and weakening INR," even though economic activity remains strong. Kotak Mahindra Bank forecasts FY27 inflation at 5%.
ICRA's Aditi Nayar has raised the FY27 crude oil price forecast to $95 per barrel from $85, citing ongoing tensions in the Middle East. Barclays' Aastha Gudwani noted that the Middle East conflict could slow growth while increasing inflation. Despite these risks, Barclays anticipates the RBI will 'look through' the immediate supply shock and maintain rates in June.
Consumer inflation expectations for FY27 have also increased, with the median estimate now at 4.9%, above the RBI's target of 4%. Some economists think the RBI might wait to tighten policy unless inflation exceeds the 6% upper limit, which currently seems unlikely according to India Ratings and Research. However, Yes Bank and QuantEco Research have more hawkish outlooks, predicting the policy rate could reach 6% by the end of FY27.