RBI likely to extend rate pause; neutral stance seen unchanged

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The economists surveyed also unanimously expect the Reserve Bank of India (RBI) to retain its neutral stance. The policy decision will be announced August 5.

Economists described the latest review as a classic "wait-and-watch" policy meeting. While they expect the RBI to hold rates, some believe the central bank could warn that a prolonged conflict in West Asia, accompanied by further spikes in oil prices and heightened global volatility, may warrant a rate hike in the future.

However, Madhavi Arora, chief economist, Emkay Global, a stock broking firm, expects the RBI to balance that cautious tone with optimism over the strong inflows through the dedicated forex-inflow programs.

Until July 31, these programs garnered nearly $41 billion.

Bank of Baroda's economist Sonal Badhan in her report on Saturday.

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Kotak Mahindra Bank expects a 50-basis-point hike in the second half of FY27, while Yes Bank said an increase could come as early as the October or December policy meeting, depending on how macro and global conditions evolve.

One basis point is a hundredth of a percentage point.

State Bank of India, too, expects caution from the central bank.

"Oil volatility, rupee pressure, external-flow caution and higher inflation projections make an explicitly dovish message less likely," SBI chief economist Soumya Kanti Ghosh said in a report on Saturday.

Inflation Forecasts

Economists, however, are divided on the central bank's 5.1% inflation forecast for FY27. While some expect the RBI to lower its inflation forecast, others believe it will leave the projections unchanged. Inflation in the June quarter was at 3.9% versus a projected 4.2%.

Interestingly, both camps cite oil prices to support their view. Those favouring a downward revision point to crude prices remaining below the $95/barrel June assumption of the central bank. Others argue the RBI is likely to remain cautious given the risk of another spike in global oil prices.

Goldman Sachs and Standard Chartered expect the RBI to revise its inflation forecast downward, reflecting the recent softening in crude oil prices.

IDFC First Bank, however, expects the RBI to leave its inflation forecast unchanged.

“You never know when crude prices spike again. So even though Q1 inflation came below RBI projections, I think they will keep the inflation forecast unchanged,” said Gaura Sen Gupta, chief economist, IDFC First Bank. HDFC Bank and ICICI Securities PD, along with Bank of Baroda and Kotak Mahindra Bank, expect inflation forecasts to be unchanged.

The RBI has forecast Q1FY27 and the full year FY27 GDP at 6.6%. In the last three policies, it lowered Q1FY27 GDP growth projection from 6.9% to 6.6% due to the war in West Asia. But most economists expect Q1FY27 GDP to exceed central bank projections. SBI expects Q1FY27 GDP at 7%. The government is due to publish official Q1 GDP data on August 31.

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