India Ratings and Research forecasts that the Reserve Bank of India (RBI) will maintain its key repo rate at 5.25 per cent throughout FY27, even as inflation is expected to remain within the central bank's tolerance band despite rising fuel prices and geopolitical uncertainties.
Key Points
- India Ratings and Research forecasts the RBI will keep the repo rate at 5.25 per cent for the entirety of FY27, anticipating inflation to remain within the central bank's tolerance band.
- The agency projects India's GDP growth at 6.7 per cent and retail inflation at 4.4 per cent for FY27.
- Icra, another rating agency, has revised its FY27 GDP forecast downwards to 6.2 per cent, citing elevated crude oil prices and geopolitical uncertainties.
- Private investments are expected to remain subdued due to slowing export demand, domestic inflation, and consumer spending concerns, while the trade deficit is projected to hit a 10-year high.
- The rupee is anticipated to depreciate by 6-7 per cent on average during FY27, and the 10-year government security yield is likely to stay above 7 per cent.
The Reserve Bank of India (RBI) is expected to hold the repo rate at 5.25 per cent for the rest of FY27, said a report by India Ratings and Research, noting that inflation would likely stay within the central bank's tolerance band despite higher fuel prices.
The agency projected gross domestic product (GDP) growth at 6.7 per cent and retail inflation at 4.4 per cent for FY27. Icra, another rating agency, trimmed its FY27 GDP forecast to 6.2 per cent from 6.5 per cent, citing elevated crude oil prices and geopolitical uncertainty.
It said GDP growth will moderate to 7.0 per cent in the fourth quarter of FY26, marking a three-quarter low compared to 7.8 per cent in the previous quarter.
Economic Slowdown and Inflationary Pressures
According to Icra, the slowdown in the fourth quarter was driven by weaker industrial and services sector growth, along with disruptions in exports and rising input costs affecting manufacturing margins.
During its April review of the monetary policy, the RBI projected FY27 GDP growth at 6.9 per cent.
"The premise that we are using as to why we are anticipating status quo in the key policy rates is even though we are seeing an upward trajectory in CPI... we are still expecting or projecting the CPI to remain within the RBI tolerance band less than 6 per cent," India Ratings said, referring to the Consumer Price Index.
"We don't expect the RBI to increase or reduce the repo rate in the rest of this fiscal. It is likely to remain the same at 5.25 per cent."
Global Conflicts and Domestic Impact
The West Asia conflict's impact is visible across global inflation trends, crude prices and currency movements, and it is beginning to weigh on India's growth outlook.
Private and government consumption are expected to slow down due to inflationary pressures, crude prices and concerns about the monsoon, India Ratings said.
Private investments in India could remain subdued as companies adopt a "watchful mode" amid slowing export demand, elevated domestic inflation and uncertainty over consumer spending.
Sectors dependent on crude oil derivatives were likely to face greater pressure, while services segments such as data centres and global capability centres could provide some support.
Trade Deficit and Rupee Depreciation
India Ratings projected the trade deficit at around 10.4 per cent of GDP – the highest in the past 10 years and driven by elevated crude prices, currency depreciation and higher imports of fuel, electronics, gold and silver.
It said the rupee was expected to depreciate by around 6-7 per cent on average during FY27.
The 10-year government security yield was likely to remain above 7 per cent amid concerns over the fiscal deficit and government borrowing.
Higher yields could push up borrowing costs for states, corporates and non-banking financial companies.
Crude Oil Prices and Fiscal Position
India Ratings assumed average crude oil prices at $95 per barrel in FY27 — averaging $110 per barrel in the first quarter before easing gradually through the year.
It estimated that every $10 per barrel increase in crude oil prices could reduce GDP growth by 44 basis points and increase inflation by 93 basis points.
The agency said the government's fiscal position could face pressure from lower excise duty collections and higher subsidy requirements for fuel, LPG and fertilisers.
However, it said any government intervention was more likely to be in the form of guarantees and liquidity support rather than direct cash transfers.
El Niño Impact and Agricultural Resilience
India Ratings said the impact of El Niño was likely to become more visible from the second quarter of FY27, adding that higher irrigation coverage and the increasing share of livestock and forestry within agriculture could cushion the impact on farm output.
