The Reserve Bank of India's decision to keep the repo rate unchanged at 5.25% may have offered temporary relief to borrowers, but the central bank's sharply revised inflation outlook has reopened a debate on whether rate hikes could return later in FY27.
While most economists do not see an immediate risk of a rate hike, several have warned that the possibility of monetary tightening in the second half of the fiscal year can no longer be ruled out.
Garima Kapoor, Deputy Head of Research and Economist at Elara Capital, believes the groundwork for tighter policy is gradually being laid.
"While expectations with respect to the rate decision were on expected lines, RBI has announced significant measures to prop the rupee. As inflation concerns get entrenched, the case for a rate hike develops towards the second half of FY27," Kapoor said.
Aditi Nayar, Chief Economist at ICRA, also sees a possibility of tightening later in the year.
"The evolution of the monsoon rains, its impact on agricultural output and inflation, as well as any emerging signs of generalisation of inflationary pressures would drive the timing of the next rate action. As of now, we cannot rule out a rate hike in Q3 FY2027," she said.
Bond market participants appear to be leaning towards a similar view. Murthy Nagarajan, Head of Fixed Income at Tata Asset Management, noted that markets have already begun pricing in a tighter policy path.
"With CPI inflation revised higher, we may expect a rate hike in the coming months. However, the bond market has already factored three rate hikes, with the ten-year yield trading around 7%," he said.
Among the more hawkish voices is Debopam Chaudhuri, Chief Economist at Piramal Group, who sees the RBI's inflation projections as an early warning of future tightening.
"The inflation outlook effectively serves as a signal of continued policy caution, or in a way precursor to hawkishness," Chaudhuri said.
He expects the first policy rate hike to materialise by February 2027, marking the beginning of a formal tightening cycle.
However, not everyone is convinced that the RBI will need to raise rates this fiscal year.
Dipti Deshpande, Principal Economist at Crisil, expects the central bank to look through the near-term rise in inflation if energy prices stabilise.
"With this, headline inflation will stay within MPC's target range of 2-6% despite rising from the current rate and edging closer to the upper tolerance inflation band in the interim. If energy prices normalise in the coming months, we expect the MPC to look through the short-term rise in inflation," she said.
Deshpande expects the RBI to balance inflation concerns against slowing growth and continue to hold rates through FY27.
On Friday, the RBI raised its FY27 inflation forecast to 5.1% from 4.6% projected in April, citing surging crude oil prices, supply chain disruptions arising from the West Asia conflict and weather-related risks associated with a weak monsoon and potential El Niño conditions.
Although the revised projection remains below the RBI's upper tolerance threshold of 6%, it represents a significant shift from the benign inflation environment that enabled the central bank to cut rates by 125 basis points since February 2025.
The central bank itself has signalled growing concern. Governor Sanjay Malhotra warned that while inflation remains below the 4% target for now, second-round effects through wages and inflation expectations could emerge if supply-side shocks persist.
The RBI expects inflation to rise steadily through the year, touching 5.9% in the third quarter before moderating to 5.4% in the fourth quarter. For the full year, inflation is projected at 5.1%.
The inflation challenge is being driven largely by imported factors. International crude oil prices have averaged around $110 per barrel in recent months, substantially higher than the $85 per barrel assumption used in the April policy review. Prices of fuel, fertilisers and industrial inputs such as chemicals, metals, rubber and plastics have also risen sharply, raising the risk of broader cost-push inflation.
At the same time, the RBI has lowered its FY27 growth forecast to 6.6% from 6.9%, highlighting the difficult balancing act facing policymakers. While domestic demand remains resilient, elevated energy costs and supply disruptions are beginning to weigh on economic activity.
For now, the central bank appears comfortable waiting. Inflation remains within the target band, core inflation is relatively contained and growth risks are intensifying. The RBI has also opted to address external-sector pressures through measures aimed at attracting foreign capital and supporting the rupee rather than through interest rate action.
