The Monetary Policy Committee (MPC) unanimously kept the repo rate unchanged at 5.25 per cent, retaining its neutral policy stance, which is in line with market expectations. Further, as the central bank’s growth and inflation projections saw only marginal revisions of 0.1 percentage point, the private lender noted forecasts for the second half of FY27 remain broadly unchanged.
For the domestic economy, the lender expects growth to be lower in H2 than in H1 on a high base, and thus the RBI would be keen to see how actual growth outcomes pan out in the coming months. It noted, despite concerns that global macroeconomic volatility would weigh on India’s economy, the impact has been limited, with most high-frequency indicators pointing to robust growth in the first quarter and sustained momentum in the second quarter. Barring the PMI, most key indicators suggest the economy is on an improving growth trajectory.
“Within the domestic economy, growth is expected to be lower in H2 than in H1 on a high base and thus RBI would be keen to see how actual growth outcomes pan out in coming months. Given the far improved high frequency indicators, we expect FY27 growth at 6.9% with growth settling closer to 7.2% in FY28,” it said.
Commenting on the policy outcome, the report said the RBI has much more visibility on the near term than over the medium-term because of global uncertainty and El-Nino. RBI now sees risks to both growth and inflation as evenly balanced, compared with its previous policy review, when growth risks were tilted to the downside and inflation risks to the upside, it noted.
The apex bank’s projection of 7.3 per cent growth for the first quarter of FY27 signals an improving growth trajectory heading into FY28, supported by a recovery in underlying demand. With core inflation (excluding gold) also firming, the projections suggest that if growth remains strong through the second half of FY27 and carries into the next fiscal year, a case could emerge for policy rate hikes, particularly if core inflation stays above the RBI’s target.
“However, if oil prices are lower, rate hikes may happen with a lag. This makes us believe that 50bps rate hike cycle either starts from April 2027 (low oil prices) or December 2026 (high oil prices). Base case is later than sooner,” it said.
As per the report, India’s growth outlook is expected to remain favourable as the Reserve Bank of India (RBI) is unlikely to undertake durable liquidity absorption measures following the FCNR deposit-related liquidity infusion. At the same time, growth-supportive liquidity conditions may lead to a cumulative 50 basis point increase in policy rates, the private lender noted.