RBI Likely to Maintain Interest Rates in June, Markets Expect Future Hikes

RBI Likely to Stay Pat on Interest Rates in June Meeting

The Reserve Bank of India (RBI) is expected to maintain its current interest rate stance in the June monetary policy committee (MPC) meeting scheduled for June 3-5. However, a growing minority of market participants believe that the central bank may introduce an interest rate hike after a three-year hiatus.

According to a Moneycontrol poll of 14 market participants, 10 of them expect the RBI to stay pat on interest rates, while four anticipate a rate hike starting from the June meeting. The consensus among market participants suggests that at least a 50-basis-point hike will be implemented in FY27 to combat inflationary pressures resulting from supply chain disruptions caused by the West Asia war.

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The RBI has reduced interest rates by a cumulative 125 basis points since February 2025, with the last rate cut in December 2025. Market participants had initially expected the RBI to maintain a prolonged pause in interest rate policy, subject to future market conditions. However, changes in Brent crude price assumptions, rupee movements, and inflationary pressures have altered the market's expectations.

The ongoing conflict in West Asia has led to sustained pressure on inflation, bond yields, and the rupee. Brent crude prices remain elevated above $100 per barrel, and experts do not anticipate a decline below this level as long as geopolitical tensions persist. The sharp depreciation of the Indian rupee from Rs 90 per dollar to Rs 95 per dollar is the sharpest fall in a decade.

Money markets are already pricing in tighter monetary conditions, with short-term funding instruments such as certificates of deposits (CDs) and commercial papers (CPs) trading above the policy repo rate of 5.25 per cent. The one-, two-, three-month, and one-year commercial paper rates have jumped from an average of 6.87 per cent at the start of the year to more than 8 per cent, a nearly 100 basis-point surge.

The benchmark 10-year government bond yield has moved higher in recent weeks and is now trading near 7.10 percent, up a massive 45 bps from 6.66 percent on February 27, before the war in West Asia. This significant deviation indicates a potential rate hike.

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Economists are forecasting at least a 20-30 bps hike in the coming months, as higher crude prices feed into transportation, freight, and logistics costs. The inflation print has seen a gradual rise in the last two months, with the consumer price index (CPI) coming in at 3.48 per cent in April, as compared to 3.4 per cent in March.

Several economists expect an upward revision of inflation projections for FY27, should Brent crude prices continue to stay above $100 per barrel in the coming months, and the consistent depreciation of the rupee. The RBI had guided FY27 inflation at 4.6 per cent in the April MPC review, while projecting FY26 CPI to come in at 2.1 per cent.

Oil marketing companies have announced a cumulative rise of Rs 7.50 per litre for both petrol and diesel starting from May 15, with the latest rise being over Rs 2.50. This is expected to push up Headline CPI by 48 bps as a direct impact and by an estimated 25 bps as an indirect impact.

Monsoon-related risks may also feed into the inflation print, with economists saying that El Niño-related risks push food prices higher than their base-case assumption. While inflation concerns are more pronounced, there is still more clarity needed on the impact on economic growth.

The RBI had projected real GDP growth of 6.5 per cent for FY27 at the policy review. Economists are now pencilling in downside risks from elevated energy prices, weaker consumer demand, and tighter financial conditions. Yes Bank projects that India's growth could slow to 6.8 per cent in FY27, down from 7.6 per cent in FY26, with Q1 and Q2 at 7.2 per cent and 7.1 per cent, respectively.