India's central bank, the Reserve Bank of India (RBI), is under increasing pressure to raise interest rates, with expectations for a significant hike in June. A new report from Standard Chartered suggests a 50 basis points increase in rates for the fiscal year 2027, beginning next month, primarily in response to persistent retail inflation and a weakening rupee.
The forecast comes as the Indian rupee (INR) continues to depreciate against the US dollar, raising concerns among policymakers. The currency's struggle is compounded by ongoing conflict in West Asia and persistently high global oil prices, which have remained above $100 per barrel. The finance ministry is reportedly monitoring the situation closely, exploring measures to bolster domestic economic sentiment and attract foreign investment.
Inflationary Pressures Mount
Standard Chartered's revised forecast for FY27 Consumer Price Index (CPI) inflation now stands at 4.9%, up from an earlier 4.7%. While April's CPI inflation of 3.48% was softer than anticipated, recent hikes in petrol and diesel prices (Rs 3.9 per litre) are expected to push inflation higher in May and June. Additionally, wholesale inflation reached a 42-month high of 8.3% in April, signaling broader price pressures, even though the RBI primarily tracks CPI for its rate-setting decisions.
Rupee Depreciation and RBI Intervention
The rupee's depreciation has been sharper than expected, trading at 96.80 against the US dollar, exceeding previous June-end forecasts of 93. This rapid decline raises the risk of second-order effects on CPI, strengthening the argument for a rate hike. The falling rupee not only reflects weakened investor sentiment but also exacerbates balance of payments challenges, making essential imports like crude oil and fertilizers more expensive.
In response to the currency's slide, the RBI has actively intervened in the market. This included announcing a $5 billion dollar swap and direct market interventions to prevent the rupee from breaching the 97-mark. These efforts, combined with a pullback in crude oil prices (WTI slipping below $101), provided some temporary relief, with the rupee gaining 49 paise to close at 96.37 against the US dollar on Thursday.
Jateen Trivedi, VP Research Analyst - Commodity and Currency, LKP Securities, noted, “A pullback in crude oil prices further supported the rupee, with WTI crude slipping below the $101 mark, easing immediate concerns around India’s import bill and inflation pressure.”
However, experts caution that this recovery is driven more by profit booking and softer crude prices than by fundamental structural changes. The six-member Monetary Policy Committee (MPC), chaired by RBI Governor Sanjay Malhotra, is scheduled to meet from June 3-5, where these critical economic indicators will undoubtedly shape their decision on the repo rate.