India’s still-benign inflation at 3.48% in April, below the RBI’s 4% medium-term target for over a year, gives the central bank scant reason to act urgently.
But, with crude oil prices hovering about 30% over levels seen before the U.S.-Israeli war with Iran, the rupee down roughly 6% for the year and wholesale inflation accelerating sharply in April, a growing number of economists now expect policy action may eventually be needed to limit the pass-through to inflation.
Nearly 80% of economists, 44 of 56, in the May 22-29 Reuters poll expected the Monetary Policy Committee to keep the repo rate unchanged at 5.25% on June 5.
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Among other respondents, 11 forecast a 25-basis-point hike and one expected a bigger 50-basis-point increase. In an April poll only one respondent predicted a June rate lift.
“With growth facing downside risks while inflation faces strong upside pressures, we expect the RBI to hold rates steady in June… as supply shocks perceived as temporary might not warrant an interest rate action immediately,” said Aditya Vyas, chief economist at STCI Primary Dealer.”Interest rates are not a good tool to counter large supply shocks. Also, I do not think the RBI MPC will increase rates to defend the rupee since it is beyond the remit of the MPC and precedents provide evidence it is not an effective antidote to depreciation.”
But not everyone agrees the RBI should keep rates steady.
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“Without any hikes the financial market perception that domestic policies remain unaligned with tight global financial conditions will continue to grow, inflating risks of repeated or renewed speculative pressures on the exchange rate,” said ANZ economist Dhiraj Nim.
A shift to a “hawkish” policy stance would be prudent, he added.
The central bank has already spent billions of dollars to slow the rupee’s decline as a global risk-off environment accelerates foreign outflows from India.
Meanwhile, other Asian central banks have already begun tightening policy to shore up their currencies. Bank Indonesia delivered a surprise 50-basis-point rate hike last week, and the Philippines’ central bank raised rates 25 basis points in April.
India, Indonesia and the Philippines are especially exposed as higher oil import costs coincide with capital outflows driven by investors seeking safer assets.
Still, when asked if the RBI should consider using monetary policy alongside FX intervention to cushion the rupee’s fall, a majority of economists, 14 of 18, said no.
Poll medians showed the central bank would raise interest rates by 25 basis points in the fourth quarter and again in the third quarter of 2027. Most economists expected at least one 25-basis-point rate increase by end-2026 compared with expectations in the April survey for no rise through 2027.
Mizuho’s head of macro research Vishnu Varathan said the RBI hiking rates was “a matter of when not if”, and argued moving “sooner rather than later at the August meeting makes sense and mitigates unnecessary pain”.