RBI Interest Rate Hike Unlikely in June, Economists Predict Future Increase

Reserve Bank of India Unlikely to Raise Interest Rates in June Amid Inflationary Pressures

The Reserve Bank of India (RBI) is expected to maintain its current interest rates at its upcoming June monetary policy meeting, despite mounting inflationary pressures from elevated oil prices and geopolitical tensions. A recent survey of 11 economists conducted by Moneycontrol found that most respondents do not anticipate a rate hike in June, with the exception of Standard Chartered's Anubhuti Sahay.

However, economists increasingly believe that the RBI may be forced to tighten policy later in the year if crude oil prices remain elevated and food inflation accelerates further. The survey found that most respondents expect cumulative rate hikes of 25-50 basis points either in the October policy cycle or later in FY27.

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The median expectation in the survey pegs the RBI's policy rate at 5.75 percent by the end of FY27, compared with the current rate of 5.25 percent. Economists cited the prolonged West Asia conflict, elevated crude oil prices, a weakening rupee, and weather-related risks to food inflation as the key reasons behind the shift in rate expectations.

The Indian crude basket averaged $107.96 per barrel in May, down from $114.48 per barrel in April. The rupee depreciated to 96.96 against the dollar this week from 90 five months ago. The government has raised petrol and diesel prices by Rs 4 since last week, which is likely to start reflecting in consumer inflation.

A Moneycontrol analysis found that India's retail inflation could surge by up to 60 basis points (bps) in the coming months due to spiralling fuel, milk, and gold prices. Economists expect FY27 inflation to be around 4.9 percent, higher than the RBI's medium-term target of 4 percent and significantly above the sub-4 percent levels seen earlier this year.

While some economists believe that the RBI may avoid tightening unless inflation breaches the upper tolerance band of 6 percent, others expect the policy rate to rise to 6 percent by the end of FY27. The RBI's June policy meeting is expected to focus heavily on inflation risks stemming from imported energy shocks and weather disruptions, even as growth indicators remain relatively resilient for now.

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