India: RBI holds again in June but highlights El Niño and Iran war risks
RBI stands pat for third successive meeting: On 3–5 June, the monetary policy committee of the Reserve Bank of India (RBI) left its policy rate at 5.25% for the third meeting in a row. The vote was unanimous. June’s hold had been widely expected by the market. The RBI also announced a host of measures to ease pressure on the balance of payments, including making it easier for foreigners to buy Indian shares and sovereign bonds.
RBI raises inflation forecasts again: In its press release, the RBI again emphasized that, before altering monetary policy, it would be “prudent to wait” to assess the impact of the Iran war and the El Niño weather pattern on the outlook for GDP growth and inflation. The RBI further raised its inflation forecasts for the fiscal year ending March 2027 (FY 2026) by 0.5 percentage points to 5.1% and again said risks were skewed to the upside. The RBI also upped its projection of core inflation for FY 2026 by 0.3 percentage points to 4.7%. Both projections are above the Bank’s 4.0% inflation target.Meanwhile, the RBI cut its projection for GDP growth in FY 2026 to 6.6% from 6.9%, still slightly above our Consensus.
Panelists begin to hike interest rate forecasts: The monetary policy committee opted to leave its monetary policy stance as ‘neutral’, aligning with our Consensus Forecast for the RBI to hold rates steady this fiscal year. However, our panel has begun to raise its projections for the policy rate, with a substantial minority now expecting the RBI to tighten monetary policy ahead. Much will hinge on the path of the Iran war, particularly the speed with which the Strait of Hormuz is reopened; a longer closure would likely lead price pressures to spread beyond fuel and energy via second-round effects, forcing the RBI to hike.The RBI’s next meeting is set for 3–5 August.
Panelist insight: ANZ’s Khoon Goh and Dhiraj Nim have turned more hawkish:
“If the repo rate remains at 5.25%, the one-year-ahead real policy rate would fall close to zero, which would sit uneasily with inflation above the 4% target and with the need to preserve returns for domestic savers. We are therefore pushing our rate hike call to August 2026 for now, while continuing to monitor incoming economic data, oil prices and the INR.”
In contrast, analysts at Nomura are keeping their projections steady:
“By keeping policy rates on hold despite significantly raising the FY27 forecasts for inflation, we think the RBI has inadvertently set a high bar for any policy deviation. The RBI’s litmus test for tightening remains the generalisation of supply side inflation shocks, and we believe it will be wary of the collateral damage on weakening growth. Consequently, we retain our forecast that the RBI will remain on policy hold for the foreseeable future, including at the next meeting in August.”