DBS Group Research economist Radhika Rao says the Reserve Bank of India (RBI) kept its policy rate at 5.25% with a neutral stance but a clearly hawkish tone, focused on inflation and currency stability. She highlights strong FY26 growth at 7.7% real Gross Domestic Product (GDP), but warns that higher Oil prices, El-Nino risks and global conflict could pressure FY27 growth and inflation.

RBI pause, growth strong but vulnerable

"The RBI monetary policy committee (MPC) left the benchmark rate unchanged at 5.25%, along our expectations, while the stance was maintained at neutral. Policy guidance was cautious, as the Governor highlighted tightening global policy conditions, prolonged West Asia crisis, pipeline inflationary risks domestically on higher oil as well as sub-normal monsoon and challenges to the growth outlook."

"If CPI inflation overshoots 5% yoy in FY27 in line with the central bank’s forecast (DBSf: 4.9% - faces upside risks), the current repo rate at 5.25% will narrow the real rate buffer considerably, opening the door to hikes."

"We see room for two hikes, 25bp each in 2HFY27 (from October) when average inflation would have surpassed the mid-point of the 2-6% target and risks of a spillover to demand/ core readings would be material."

"Markets are likely to move on from the backward-looking data and focus on potential spillover risks into FY27, particularly given the prospect of a prolonged disruption in the supply of critical inputs to downstream industries, higher energy as well as food costs impacting purchasing power and tighter financial conditions."

"We maintain our real GDP growth forecast at 6.5% for FY27, compared to RBI’s revised 6.6% estimate."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)