The Reserve Bank of India (RBI) is likely to postpone any repo rate hikes, a shift in outlook largely driven by an interim peace agreement between the United States and Iran. This deal has led to a substantial decline in global crude oil prices, alleviating earlier inflationary pressures.
Following its June 5 policy review, where the Monetary Policy Committee (MPC) maintained the repo rate at 5.25%, most economists had anticipated rate increases would commence between October and December. Some even projected an August start to the tightening cycle due to rising energy and food prices. However, this perspective has now changed, with many experts pushing back their expectations for rate hikes to October-March or even suggesting no increase in 2026.
Global Oil Prices Drive Policy Rethink
A key factor in this revised outlook is the sharp fall in global crude oil prices. Brent crude, which had soared to nearly $122 per barrel in April amid intensified conflict in West Asia, dropped below $80 per barrel after the US-Iran interim deal was announced on June 15.
Analysts from Nomura noted that the MPC's previous commentary might now be “somewhat obsolete” given the recent rapprochement and falling oil prices. They anticipate a “more relaxed MPC” for the August meeting and expect the committee to keep rates steady for the remainder of the year.
Economists Weigh In
Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India, echoed this sentiment, stating that a rate hike by the MPC is currently unwarranted. SBI projects the average crude oil price for India to be around $85 per barrel, potentially saving the nation $25 billion on its oil import bill.
YES Bank also commented that if oil prices stabilize around $70-$75 per barrel, and the government avoids further pass-through costs, the necessity for the RBI to initiate a hiking cycle significantly diminishes. They suggest rate hikes are more likely to be deferred until the second half of fiscal year 2027, pending assessment of monsoon impact on food prices.
Inflation Outlook and Other Factors
Economists widely expect the RBI to revise its inflation forecast downwards if oil prices average between $80-$85 per barrel. In its June policy review, the central bank had raised its FY27 Consumer Price Index (CPI) inflation projection by 50 basis points to 5.1%, citing elevated energy prices and expectations of below-normal monsoon rains.
Barclays indicated that concerns about an earlier-than-expected rate hike would only arise if inflation showed sustained second-round effects, such as cascading fuel costs leading to broader transport fare increases or a food supply shock from weaker-than-expected monsoon rainfall. Barclays currently foresees a gradual 50 basis point hiking cycle commencing in January-March.
Furthermore, foreign capital inflow measures introduced by the RBI in June have also contributed to reducing the need for higher rates to counteract rupee depreciation. These measures included full hedging cost cover for banks raising fresh three- to five-year FCNR(B) deposits and a concessional foreign exchange swap to encourage external commercial borrowings by public sector undertakings. Since these steps were implemented, the rupee has appreciated more than 1% against the dollar.