According to DBS Group Research economist Radhika Rao, the Reserve Bank of India (RBI) kept its policy rate unchanged at 5.25% with a neutral stance, but adopted a clearly hawkish tone in its latest policy meeting. The RBI's focus remains on inflation and currency stability, with the central bank highlighting tightening global policy conditions, the ongoing West Asia crisis, and domestic inflationary risks stemming from higher oil prices and the possibility of a sub-normal monsoon. These factors, along with global conflict, are cited as potential pressures on both growth and inflation for FY27 [1].
DBS notes that India's real GDP growth for FY26 is strong at 7.7%, but warns that the outlook for FY27 is vulnerable to several risks. The RBI's own forecast suggests that if CPI inflation overshoots 5% year-on-year in FY27, the current repo rate of 5.25% would significantly narrow the real rate buffer, potentially opening the door to rate hikes. DBS forecasts average inflation at 4.9% for FY27 but acknowledges upside risks. The research team sees room for two 25 basis point hikes in the second half of FY27 (from October) if inflation surpasses the mid-point of the RBI's 2-6% target and spillover risks to demand and core inflation become material [1].
Market participants are expected to shift their focus from backward-looking data to potential spillover risks in FY27, particularly in light of possible prolonged disruptions in the supply of critical inputs, higher energy and food costs impacting purchasing power, and tighter financial conditions. DBS maintains its real GDP growth forecast for FY27 at 6.5%, slightly below the RBI’s revised estimate of 6.6% [1].
CONCLUSION
The RBI's decision to hold rates steady while maintaining a hawkish outlook signals caution amid rising inflationary and growth risks for FY27. Markets are likely to focus on forward-looking risks, including energy prices and supply disruptions, with the possibility of rate hikes later in FY27 if inflation pressures persist.