RBI likely to keep status quo on policy rate as threats loom
While 11 out of 15 economists participating in the survey predict a pause in the repo rate at the Monetary Policy Committee (MPC) meeting on June 3-5, four predict an increase of 25 basis points, or a quarter point.
Also Read: RBI sees services exports, remittances buffering current account in FY27
For the fiscal year, 13 expect a cumulative rate increase of 50-75 basis points. The other two predict that the central bank will extend the pause throughout the year. PPC kept the interest rate unchanged at 5.25% at its April meeting.
The June meeting took place amid rising fuel prices and a sharp weakening of the rupee due to the impact of the US-Iran war, as well as the threat of El Niño conditions that could affect the monsoon, thereby damaging food production and driving up prices.
Also Read: FinMin says India faces oil, inflation and monsoon risks despite economic resilience
Economists who favor a pause view current inflationary pressures as largely supply-driven and therefore less susceptible to higher interest rates. They stated that increasing borrowing costs in such an environment would do little to reduce price pressures, but would create the risk of a further slowdown in economic growth. “The West Asia war has caused a supply-side shock,” Gaura Sen Gupta, chief economist at IDFC First Bank, told ET.
Inflation Focus
“The West Asia war has caused a supply-side shock,” Gaura Sen Gupta, chief economist at IDFC First Bank, told ET.
“Monetary policy is not an ideal tool to respond, given that it operates primarily through the demand channel. A rate hike to address inflation risks would only worsen the demand destruction,” said Sen Gupta of IDFC First.
However, economists who expect an increase said monetary policy should focus on stabilizing inflation expectations.
“Following the increases in petrol prices, I expect FY27 inflation to be 5.0-5.5% and also expect another round of fuel price hikes. In such a situation, inflation is expected to increase. So, I think the RBI should consider an increase now instead of waiting to increase it during future policies,” Madhavankutty G, chief economist at Canara Bank, told ET, predicting a quarter-point hike.
Anubhuti Sahay, head of India economic research at Standard Chartered Bank, also expects a 25 basis point increase and predicted that the RBI will revise its inflation forecast for FY27 to 4.9%. Sahay wrote in his report that the sharp depreciation of the rupee increases the risk of a second-order impact on consumer inflation and strengthens the possibility of an increase.
In April, the RBI predicted inflation would average 4.6% and the economy would grow 6.9% in fiscal 2027.
Some economists expect the RBI to announce measures to address the capital outflow problem that is hurting the local currency. Institutions such as MUFG, Canara Bank and Nomura expect measures such as tightening of limits under the Liberalized Remittance Program and further hedging restrictions.
“The rapid return of depreciation pressures points to the need for more sustained policy support in times of increased global uncertainty,” the State Bank of India said in a note on Sunday.
The rupee has fallen nearly 11% in FY26 and over 3% in FY27 so far.
The RBI started reducing policy rates from February 2025, reducing them by 125 basis points to 5.25%; The last reduction was made in December 2025. Since then, MPC has maintained the status quo on interest rates.
“Even if CPI inflation results permanently violate the RBI’s 4% target, we believe the MPC will treat it as a supply shock and continue its ‘neutral pause’,” Aastha Gudwani, chief India economist at Barclays, said in a report.
