RBI MPC may hike inflation forecast, trim growth rate

MUMBAI: While the majority of forecasters and market participants expect Reserve Bank of India's Monetary Policy Committee meeting to vote for a status quo on interest rates, the forthcoming MPC statement on June 5 will be observed minutely.

With disruptions owing to the West Asia conflict now approaching 100 days, this is no longer a short-term disturbance that the central bank can look through. It will now have to factor in the impact of the crisis into its growth and inflation forecasts.

Second, with the rupee depreciating well over 6% in 2026 - its worst performance in a decade - there is an expectation that the central bank may use policy to manage the exchange rate. Finally, the market is watching to see whether RBI will follow up on the governor's statement that the rupee is undervalued.

"We do not expect any change in repo rate or stance this time. However, the tone will be cautious, leaning towards being hawkish. We can expect RBI to increase its inflation forecast towards 5% and lower that for GDP to around 6.5% from 6.9%. We may not expect any specific measure as such on foreign exchange, though there will be an explanation given on developments," said Madan Sabnavis, chief economist, Bank of Baroda.

SBI's economic research department has also revised the full-year FY27 inflation projection to 5-5.1%, with risks tilted to the upside. May's imported inflation is projected to jump to 7.3%. "The full-year FY27 GDP growth rate is now cast at 6.6%, subject to revisions due to ongoing geopolitical uncertainties," the report said.

Making matters worse for inflation is the forecast that the southwest monsoon would be weak at around 90% of the long-period average. It will also likely be delayed.

On the rupee, the SBI report suggests that RBI should deploy its foreign exchange reserves of around $680 billion in a calibrated manner, combining timely and surprise interventions to check excessive volatility. Alongside this, it calls for a comprehensive balance of payments package incorporating capital controls, liquidity management and policy nudges.
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