Economists expect rate pause amid inflation risks – Firstpost

All eyes are on the Reserve Bank of India (RBI) this week as policymakers navigate rising inflation risks, volatile energy markets and global uncertainty, with markets widely expecting the central bank to keep interest rates unchanged.

The Monetary Policy Committee (MPC), which began its three-day meeting on Wednesday, will announce its decision on Friday. While the repo rate is expected to remain steady at 5.25 per cent, investors will closely track RBI Governor Sanjay Malhotra’s commentary and updated inflation and growth projections for signals on the future policy trajectory.

The June review comes at a particularly uncertain juncture. Escalating geopolitical tensions in West Asia have pushed up crude oil volatility, while concerns over monsoon variability and currency weakness are adding fresh layers of risk. For India, which imports over 85 per cent of its crude oil requirement, sustained energy price pressures pose a direct inflation and current account challenge.

Inflation risks build despite soft headline reading

Analysts say that while headline CPI inflation remains relatively contained, underlying pressures are building.

Abhishek Bisen, Head – Fixed Income at Kotak Mahindra AMC, said the policy backdrop is increasingly complex despite currently benign inflation readings. “While CPI inflation remains benign at 3.48 per cent, surging WPI and fuel costs signal emerging pressures. Growth remains strong but is facing headwinds, with the FY27 outlook softening. Bond yields and risk premia have risen, reflecting market caution,” he noted.

Bisen added that although markets are beginning to factor in the possibility of future tightening, the RBI is likely to stay on hold for now while turning more cautious in its tone. “The RBI is likely to hold the repo rate at 5.25 per cent but adopt a more hawkish tone—raising inflation forecasts, slightly trimming growth projections, and relying on forex tools to manage currency volatility,” he said.

Global shocks and supply-side pressures dominate outlook

Economists broadly expect the central bank to maintain a wait-and-watch approach, given that recent inflation moderation is being overshadowed by external shocks, particularly from energy prices and their spillover into transport, food and manufacturing costs.

A report by CareEdge Ratings highlighted that inflation risks have risen amid expectations of a below-normal monsoon, higher fuel prices and the faster transmission of wholesale inflation into retail prices. It also noted that the current inflation impulse is largely supply-driven, limiting the effectiveness of monetary policy in containing price pressures.

CareEdge estimates India’s economy could expand 6.7 per cent in FY27 if crude oil averages around $90 per barrel. However, growth could moderate to around 6 per cent if geopolitical tensions persist and oil prices climb towards $110 per barrel.

RBI likely to stay on hold amid persistent risks

SBI Research also expects the RBI to keep rates unchanged, citing persistent inflation risks and external uncertainties. It projects GDP growth at 6.6 per cent in FY27, while consumer inflation is expected to remain above 5 per cent for several quarters due to sustained fuel and commodity price pressures.

Gaurav Garg, Research Analyst at Lemonn Markets Desk, said the central bank is likely to remain cautious rather than reactive. “Much of the current inflation pressure appears to be supply-driven. In such an environment, the RBI is likely to remain watchful rather than react with immediate policy tightening,” he said.

He added that markets have largely priced in a policy pause. “From a market standpoint, a pause is largely expected and should support stability in equity and fixed-income markets. Investors will focus more on the RBI’s commentary on inflation, liquidity, currency movements and global risks than on the rate decision itself,” Garg said.

Beyond the headline decision, market participants will closely watch the RBI’s assessment of liquidity conditions, credit growth and external sector stability. Any revisions to inflation forecasts or shifts in forward guidance could prove more consequential for markets than the rate action itself.