Home loan borrowers may have found temporary relief as the Reserve Bank of India (RBI) decided to keep the repo rate unchanged at 5.25%. This decision by the Monetary Policy Committee (MPC) on Friday means that EMIs linked to this benchmark will remain stable for now.
However, this stability may be short-lived. A consensus among analysts suggests that the RBI is likely to implement interest rate hikes in the second half of the current financial year (FY27). This outlook is primarily driven by an upward revision in inflation forecasts and ongoing global geopolitical tensions, particularly the conflict in West Asia, which is impacting oil prices and supply chains.
Inflation Pressures Drive Rate Hike Expectations
The RBI has increased its inflation forecast for FY27 by 50 basis points, from 4.6% to 5.1%. Simultaneously, the central bank has lowered its GDP growth forecast for the same period from 6.9% to 6.6%. RBI Governor Sanjay Malhotra underscored the need for vigilance, warning of a distinct possibility of inflation spreading through second-round effects on expectations and wages.
Siddharth Chaudhary, head of fixed income at Bajaj Finserv Asset Management, commented, "The sharper upward revision in inflation is not easily ignored, and it quietly keeps the possibility of rate hikes alive." Mandar Pitale, head of financial markets at SBM Bank (India) Ltd., echoed this sentiment, suggesting that current inflation dynamics, with an average forecast inching up to 5.1%, create a strong case for at least two 25 basis point rate hikes between August and December 2026.
Global Conflicts and Monsoon Risks
The ongoing conflict in West Asia and its impact on crude oil prices are significant factors. Sachin Sawrikar, managing partner at Artha Bharat Investment Managers, noted, "If West Asia does not stabilise and crude stays elevated, a rate hike in the second half of FY27 is no longer a tail risk. It is a scenario markets may not be fully pricing in."
Beyond global events, domestic factors such as the monsoon's performance and its effect on agricultural output and food inflation will also heavily influence the RBI's future actions. Aditi Nayar, chief economist at ICRA, believes that the monsoon's trajectory and any signs of generalized inflationary pressures will determine the timing of the next rate action, suggesting a hike in the October-December quarter cannot be ruled out.
Divergent Views on Timing and Likelihood
While many analysts foresee rate increases, some hold a more cautious view. Jahnavi Prabhakar, an economist at Bank of Baroda, anticipates one to two rate hikes possibly post-October, once there is greater clarity on rainfall distribution. Conversely, Dipti Deshpande, principal economist at CRISIL, does not expect the MPC to hike rates this fiscal year.
Deshpande suggests that if energy prices normalize in the coming months, the MPC might overlook a short-term rise in inflation. "The MPC will balance its inflation mandate with growth, where downside risks are also deepening with prolonging of the conflict. In the milieu, we expect the MPC to keep rates unchanged this fiscal," she stated, highlighting the dual mandate of managing both inflation and economic growth.