RBI likely to maintain status quo on rates, adopt cautious approach amid West Asia crisis

Experts anticipate that the Reserve Bank will keep its key policy rate steady at 5.25 % this week, taking a cautious approach that considers potential inflation and growth headwinds stemming from the West Asia situation.

Given rising energy costs, persistent supply‑chain disruptions and a weakening rupee—largely due to external factors—some analysts believe the RBI could lift its inflation projection and trim its GDP growth forecast at the June 3‑5 bi‑monthly monetary policy meeting.

Following three days of discussions, the six‑member Monetary Policy Committee, chaired by RBI Governor Sanjay Malhotra, will reveal its decision on June 5.

In April the Reserve Bank left its key policy rate unchanged, adopting a wait‑and‑watch stance while officials evaluated the impact of the West Asia conflict on energy supplies, inflation and growth.

An SBI economic research report projects that the RBI will hold the policy steady in June amid a volatile environment.

Based on the growth‑inflation dynamic, the report forecasts that the CPI path—currently around 4‑4.1 %—could push inflation above 5 % for the next three quarters.

It also projects Q4FY26 real GDP growth near 7.2 % and FY26 GDP growth around 7.5 %.

“Our nowcast for full‑year FY2027 GDP growth stands at 6.6 %, though ongoing geopolitical uncertainties may prompt revisions as new data emerge.”

“Our recommendation is to hold rates, guided by data‑driven outlook. Nevertheless, an inflation‑targeting central bank retains tools such as Operation Twist to influence market microstructure,” the report noted.

It also stressed that the MPC should examine the exchange rate’s function as a policy anchor, extending beyond its pure inflation‑targeting remit.

Madan Sabnavis, Chief Economist at Bank of Baroda, likewise sees no alteration in the repo rate or policy stance for the coming week.

“Yet the tone will be cautious, with a hawkish tilt. We anticipate the RBI raising its inflation outlook to around 5 % and trimming its GDP growth projection to roughly 6.5 %, down from 6.9 %,” he remarked.

Sabnavis also does not foresee any distinct foreign‑exchange actions, although an explanation of developments will be provided.

In its Friday‑released annual report, the RBI announced it will review and enhance its GDP growth and inflation forecasting processes for the current fiscal year.

The RBI added that the outlook for the Indian economy in 2026‑27 stays positive, backed by robust macroeconomic fundamentals, though a prolonged West Asia conflict could introduce downside risk.

The report notes that inflation in 2026‑27 is expected to stay in line with the target, bolstered by ample foodgrain stocks, healthy reservoir levels and stable agricultural outlook, even if El Niño conditions and above‑average summer temperatures arise.

Nevertheless, upside inflation risks could arise from factors such as a surge in global fuel and commodity prices amid geopolitical tensions, the report added.

The government has defined the CPI‑based headline inflation target at 4 %, with an upper tolerance band of 6 % and a lower tolerance band of 2 % for the central bank.

According to Dipti Deshpande, Principal Economist at Crisil, the RBI is expected to keep the policy repo rate unchanged and maintain a neutral stance.

“Current inflationary pressures are primarily supply‑side, driven by higher fuel and input costs together with a weaker rupee; consequently, the MPC may opt to look through these supply‑side influences when assessing policy,” she observed.

Deshpande added that the prolonged disruption in the Strait of Hormuz has heightened upside inflation risks, prompting the MPC to closely watch the scale and speed of pass‑through from higher global energy prices to domestic headline inflation.

“The MPC is also expected to closely evaluate how evolving El Niño conditions may affect the forthcoming monsoon and the resulting implications for food‑inflation dynamics,” she added.

Aditi Nayar, Chief Economist at ICRA, noted that given the IMD’s sombre outlook on the monsoon and El Niño, together with ongoing uncertainty over the West Asia ceasefire’s duration, “we expect the MPC to stay cautious and keep rates and stance unchanged.”

The IMD forecasts that the June‑September southwest monsoon rainfall over India will be below normal, amounting to roughly 90 % of the long‑period average, with a model error of 4 %.

Vinay Pai, MD and Head of Fixed Income at Equirus Capital, observed that markets are pricing in a possible 25‑ to 50‑basis‑point rate hike, although recent RBI moves indicate a preference for liquidity management and currency stability rather than immediate tightening.

“For the June policy, the RBI is likely to hold rates steady, potentially coupling this with a more hawkish forward‑guidance tone, though the official stance should stay unchanged in the near term; a rate hike would depend on persistent macro‑economic stress,” he said.

If crude oil stays above USD 100 per barrel for a prolonged period, inflationary pressures might compel the central bank to contemplate a cumulative 50‑basis‑point increase by August, although this scenario is not the current base case, Pai noted.

The Reserve Bank had cut the policy rate by a cumulative 100 basis‑points during 2025‑26.

India’s CPI, or retail inflation, edged up to 3.48 % in April, driven chiefly by higher prices for gold and silver jewellery and certain kitchen items.

Published on May 31, 2026