The Reserve Bank of India (RBI) is expected to raise interest rates twice in the current financial year FY27 due to inflationary pressures arising from rising energy prices and the possible impact of El Nino weather conditions, according to a report by HSBC.
The report stated that the combination of energy shocks and El Nino-related disruptions could push inflation higher and slow down economic growth during FY27.
According to the report, HSBC expects headline inflation to average 5.6 per cent in FY27 after factoring in the impact of higher energy prices and temperature-related food inflation.
“With the energy and El Nino shocks coinciding, the FY27 outlook needs attention. Our model suggests the El Nino/temperature channel can add 0.5ppt to inflation over a year.... On this basis, we expect the RBI to deliver two rate hikes, over 4Q26 and 1Q27, taking the repo rate to 5.75 per cent,” the report stated.
Food inflation fears grow amid climate risks
The report highlighted that the overlap of multiple shocks, including energy, industrial feedstock costs and a likely El Nino event, has increased concerns over inflation and economic growth.
The report noted that if temperature increases remain in line with the average seen over the last 10 years, food inflation could rise significantly due to weather-related disruptions.
It added that if El Nino conditions emerge later in 2026, a large part of the inflationary impact may be felt in 2027.
The report also warned that a severe El Nino event could lead to even sharper increases in food prices.
However, it added that higher foodgrain stocks and full granaries could help ease some inflationary pressures.
Growth slowdown may limit aggressive rate hikes
Despite the expected inflation rise, HSBC said the RBI may avoid aggressive rate hikes because economic growth is also likely to slow down.
The report projected India’s GDP growth at 6 per cent in FY27, lower than HSBC’s earlier forecast of 7.4 per cent.
According to the report, the impact of these shocks is expected to be felt more strongly in the informal sector, including rural households and small businesses.
The report stated that this could change the current drivers of India’s economic growth.
HSBC also highlighted that the ongoing rise in energy prices, combined with industrial cost pressures and climate-related disruptions, could create a difficult macroeconomic environment for policymakers during FY27.
The report added that the RBI will likely have to balance inflation control with growth concerns while deciding its future monetary policy actions.
Published on May 11, 2026