The Monetary Policy Committee’s (MPC) second meeting of FY27 is scheduled from June 3 to 5.  | Photo Credit: REUTERS/DANISH SIDDIQUI

Upside risks to inflation and downside risks to growth amid the West Asia conflict may prompt the RBI’s rate setting panel to hold the policy repo rate at its upcoming meeting.

The risks to inflation and growth stem from spike in global fuel and commodity prices, supply chain disruptions, financial markets volatility, weather-related disruptions and a depreciating rupee.

The RBI, on its part, may revise the retail inflation projection upward and GDP growth projection downward and announce some measures to support the Rupee, said economists.

The Monetary Policy Committee’s (MPC) second meeting of FY27 is scheduled from June 3 to 5. The repo rate, which was last cut in December 2025 from 5.5 per cent to 5.25 per cent, was left unchanged in MPC’s last two meetings – February and April 2026.

In its April 2026 monetary policy review, the RBI projected real GDP at 6.9 per cent and retail (Consumer Price Index/ CPI)-based inflation at 4.6 per cent for FY27.

SBI’s economists, in a report, observed that going by the growth-inflation spiral, they expect the CPI trajectory (as of now) may indicate more than 5 per cent inflation for the next three quarters (current quarter at 4.0 to 4.1 per cent).

Further, FY27 CPI inflation projection is currently at 5 per cent with risks tilted to upside though well under RBI’s target range.

“We expect Q4 (January-March) FY26 real GDP growth of closer-to-7.2 per cent and FY26 GDP growth is likely to be at 7.5 per cent. Our nowcast full year FY27 GDP growth rate is at 6.6 per cent. However, with continued geopolitical uncertainties, the numbers will be revised as more data comes in. Our call is along ‘hold the rates’ with a data-driven future dependency,” they said.

Neutral pause

Barclays economists’ Aastha Gudwani and Amruta Ghare expect the MPC to persist with a neutral pause in June, looking through supply shock-driven higher inflation, using the flexibility that an inflation targeting mandate offers.

Referring to the April 2026 monetary policy report, wherein the RBI’s base case assumed crude oil at $85/barrel (bbl) forits growth and inflation forecasts, Barclays economists said, “With reality decisively shifting to the $95/bbl scenario, we expect the RBI to revise its FY27 inflation forecast from 4.6 per cent to 5 per cent on 5 June and cut its growth forecast to 6.7 per cent (from 6.9 per cent).

Manoranjan Sharma, Chief Economist, Infomerics Ratings, said the decision at the June 2026 policy review meeting is expected to be a “pause with caution”, relying more on forex and liquidity tools than immediate rate hikes.

“A modest downgrade of 20-30 basis points (bps) is expected in the growth forecast due to higher energy costs, softer external demand, and tighter financial conditions. However, resilient domestic demand may limit the extent of cuts. RBI may raise retail inflation projection by 30-50 bps as imported inflation risks from crude and Rupee weakness intensify. Food inflation remains critical, while sustained oil prices could revive core inflation pressures,” Sharma said.

Measures to defend Rupee

SBI economists noted that despite strong macro fundamentals, the Rupee is depreciating much more vis-à-vis other currencies. Therefore, there is a need for augmented intervention by the RBI.

Also, India‘s forex reserves are optimally sufficient to combat the unidirectional slide of Rupee, while aiming to curb excess/undesired volatility concomitantly as the prime aim.

The economists emphasised that there is a clear felt need for a comprehensive BOP (Balance Of Payments) package. The package can comprise capital controls and liquidity modulation.

“Can an inflation targeting Central bank also use rates to defend currency? Ideally No! But in the current unprecedented situation, the RBI must take measures to defend the Rupee, especially in a situation like this when domestic macro fundamentals are strong.

“So, should there be repo rate hike? No! The RBI must use short-term rates and nudging to manage the pressure on Rupee. The RBI could use measures like operation twist where short-term rates could rise at the expense of long-term rates,” they said.

Barclays economists said in order to defend the Rupee, the RBI can try measures such as reducing or at least smoothening out importer US Dollar (USD) demand; encouraging more exporter USD conversions; re-introducing FCNR (foreign currency non-resident) deposits at concessional rates; relax external commercial borrowing norms; easing hedging norms for foreign investors, and expand FAR (Fully Accessible Route) limits for bond investors.

Published on May 31, 2026