The Reserve Bank of India is likely to keep interest rates unchanged at its June 3-5 Monetary Policy Committee meeting as inflation remains within the RBI's target range despite rising risks from imported inflation, fuel price hikes, rupee depreciation and geopolitical uncertainties, according to SBI Research.

The report argues that while imported inflation, elevated crude oil prices, a weakening rupee and a potentially weak monsoon pose risks to the economy, the central bank should maintain a "hold" stance and rely on targeted liquidity and currency-management measures rather than a policy rate hike.

Inflation risks are rising

SBI Research expects consumer price inflation to remain above 5% for the next three quarters, with FY27 inflation projected at around 5% and risks tilted to the upside. However, the inflation outlook remains within the RBI's tolerance band.

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A major concern is imported inflation. The report notes that petrol and diesel prices have increased by around ₹7.5 per litre in May following the surge in global crude oil prices. These fuel price hikes alone could add 35-40 basis points to domestic inflation.

SBI estimates imported inflation could rise to about 7.3% in May from 6.34% in April as higher fuel prices combine with rupee depreciation.

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Why SBI still expects a rate pause

Despite these pressures, SBI believes a repo rate hike is not the appropriate response.

The report says India continues to enjoy relatively strong macroeconomic fundamentals and that the current inflation challenge is being driven largely by external factors, particularly geopolitical tensions in West Asia and rising crude prices.

"Hold the rates" remains SBI's preferred policy call, with future decisions expected to remain data dependent.

Instead of raising policy rates, SBI suggests the RBI can use other tools such as liquidity modulation, short-term interest rate adjustments and measures like Operation Twist to address market distortions and support financial stability.

Rupee weakness

A central theme of the report is the sharp depreciation of the Indian rupee.

SBI describes the pace of depreciation as "reckless," noting that the currency weakened from ₹90 to ₹95 per US dollar in just 152 days and touched 96.83 per dollar on May 20.

The report argues that the rupee's decline is disproportionate to India's economic fundamentals and calls for stronger RBI intervention in the foreign exchange market. India's foreign exchange reserves, estimated at around $680 billion, remain sufficient to combat excessive volatility, according to the report.

SBI also contends that the rupee is currently undervalued. Based on its Real Effective Exchange Rate (REER) framework, the report estimates that if REER normalises to 100, the rupee could strengthen to around 87.1 per dollar.

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Growth and risks

The report projects India's GDP growth at 7.5% in FY26, with fourth-quarter growth expected around 7.2%. For FY27, growth is projected at 6.6%, reflecting the impact of geopolitical uncertainties and higher global commodity prices.

Additional risks stem from a potentially weak monsoon. SBI notes that the southwest monsoon is expected to be below normal at 90% of the long-period average, raising concerns about agricultural output and food inflation.

Taken together, the report suggests the RBI faces a difficult balancing act. While inflation risks have increased, SBI believes maintaining rates while deploying targeted liquidity and currency-support measures remains the most appropriate course of action in the current environment.

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Published on: May 31, 2026 10:46 AM IST