The Reserve Bank of India (RBI) could raise rates by 50-75 basis points (bps) cumulatively in the remainder of fiscal year 2027 (FY27), helping contain inflation expectations without materially derailing India’s consumption story, said Tanvee Gupta Jain, chief economist at UBS Securities India.
As RBI joins global central banks in a tightening cycle, Jain sees limited risk of over-tightening but cautions that retail inflation will remain significantly above the RBI’s 4% medium-term target for the next three quarters, starting Q3FY27.
The stance change was largely in line with our expectations. We see the move as a response to resilient growth, broadening price pressures, accommodative monetary conditions, elevated crude oil price uncertainty and tighter global monetary conditions. The stance change does not materially alter our rate outlook.
We expect headline inflation to remain above 5.5% year-on-year for three consecutive quarters starting in Q3FY27, significantly above the RBI's medium-term target of 4%. As inflation accelerates, real policy rates are likely to turn negative, necessitating a recalibration of monetary policy. Accordingly, we continue to expect a 50-75 bps cumulative hiking cycle, with another 25 bps hike likely in December and scope for one further hike depending on growth-inflation dynamics.
High-frequency indicators continue to point to resilient economic activity. The UBS India Composite Economic Indicator, which tracks 15 high-frequency indicators, suggests growth remained robust in July-August following strong 7.8% GDP growth in Q1FY27. Early September data also indicate that momentum has been sustained. We therefore continue to forecast FY27 real gross domestic product (GDP) growth of 7.2%. That said, we expect growth to moderate in H2FY27 as tighter global financial conditions, elevated oil-price volatility and the lagged effects of weaker rainfall weigh on activity.