The Reserve Bank of India is anticipated to keep policy rates steady in the upcoming Monetary Policy Committee meeting. However, there may be a shift towards a more cautious stance due to escalating oil prices and a depreciating rupee impacting the inflation outlook. HSBC’s chief India economist, Pranjul Bhandari, foresees a gradual tightening with around two rate hikes starting in the fourth quarter of 2026, rather than an aggressive tightening cycle.
Bhandari highlighted that the RBI’s updated forecasts will offer insights into how policymakers assess the effects of the ongoing energy shock. In the previous review, the central bank based its calculations on an oil price assumption of approximately $85 a barrel, with an alternative scenario of $95.
The HSBC economist now predicts that the higher oil price assumption will become the RBI’s base case, potentially raising inflation projections to around 5 percent from the earlier estimate of 4.6 percent. Bhandari noted the dilemma faced by the central bank, where rising inflation supports the case for higher rates while slowing growth argues against rate hikes.
She cautioned that elevated oil prices and a potential El Nino phenomenon could pose challenges to growth, inflation management, fiscal deficit, and the current account. A recent report from CareEdge Ratings highlighted that concerns about inflation have heightened due to expected below-normal monsoon conditions and recent increases in retail fuel prices.
The report also pointed out a significant uptick in Wholesale Price Index (WPI) inflation, raising the risk of a quicker second-round impact on consumer prices. It emphasized that the current inflation surge is driven by supply-side factors rather than demand. The report projected a GDP growth rate of 6.7 percent for FY27, assuming an average crude oil price of USD 90 per barrel. However, prolonged conflicts and oil prices hovering around $110 per barrel could potentially reduce growth to approximately 6 percent.
