This bank expects RBI to raise interest rates twice in FY27. Here’s what it’s worried about
India’s economy, which is already bracing for an impact from rising oil prices, could face further challenges from rising temperatures, more so at a time El Nino conditions are expected to weigh on monsoon rains.
- May 11, 2026,
- Updated May 11, 2026 2:27 PM IST
Even as the ongoing geopolitical conflict in West Asia continues to weigh on India’s growth and inflation, there is another challenge just around the corner — the prediction of El Nino. The general expectation is that El Nino conditions could have an impact on the monsoon this year, and in turn have a bearing on the rural economy. However, economists at HSBC warn that more than the low rainfall, rising temperatures could be a bigger challenge for India’s agricultural sector.
HSBC is expecting the Reserve Bank of India’s monetary policy committee to raise interest rates twice in the current 2026-27 financial year — one in the October-December quarter and another one in the January-March quarter — taking the benchmark repo rate to 5.75%.
“With global warming, average temperatures are rising and have crossed previous thresholds. They now impact food output and inflation much more than even rains and reservoirs do. This matters a lot more in a likely El Nino year,” pointed HSBC’s Pranjul Bhandari and Aayushi Chaudhary.
According to the economists, the probability of high temperatures is stronger than the probability of low rains, and the quantum of rise in temperatures during El Nino years is rising. What could be worrying is that rising temperatures have an adverse impact across crops.
“Perishables like vegetables and fruits are traditionally more sensitive to heatwaves, and this sensitivity is rising. Durable crops like cereals, pulses, oilseeds, and sugar are not too far behind as old temperature thresholds are breached. Even animal protein sources are becoming more sensitive to heat,” pointed Bhandari and Chaudhary.
Already, India’s economy is bracing for an impact from a surge in oil prices and supply chain disruptions due to the US and Israel war on Iran. With the energy and El Nino shocks coinciding, the outlook for FY27 will need close attention.
HSBC’s model suggests the El Nino/temperature could add 0.5 percentage point to inflation over a year. With this, coupled with the energy shock, including potential fuel price increases, HSBC economists now see headline inflation averaging 5.6% this financial year, which is very close to the upper end of the targeted band of 4%, plus or minus 2%. The HSBC forecast is also higher than the RBI’s CPI (consumer price index) inflation forecast of 4.6 for the full year.
The accompanying growth shock will likely stop the central bank from increasing rates further beyond two, feel Bhandari and Chaudhary. They forecast GDP to grow 6% in FY27, lower than the last year’s forecast of 7.4%. The HSBC growth forecast is also significantly lower than the 6.9% growth that RBI has projected for the current financial year.
The informal sector — rural households and small firms — are likely to bear the brunt of this shock, and that could mark a change in India's drivers of growth, the economists added.
Even as the ongoing geopolitical conflict in West Asia continues to weigh on India’s growth and inflation, there is another challenge just around the corner — the prediction of El Nino. The general expectation is that El Nino conditions could have an impact on the monsoon this year, and in turn have a bearing on the rural economy. However, economists at HSBC warn that more than the low rainfall, rising temperatures could be a bigger challenge for India’s agricultural sector.
HSBC is expecting the Reserve Bank of India’s monetary policy committee to raise interest rates twice in the current 2026-27 financial year — one in the October-December quarter and another one in the January-March quarter — taking the benchmark repo rate to 5.75%.
“With global warming, average temperatures are rising and have crossed previous thresholds. They now impact food output and inflation much more than even rains and reservoirs do. This matters a lot more in a likely El Nino year,” pointed HSBC’s Pranjul Bhandari and Aayushi Chaudhary.
According to the economists, the probability of high temperatures is stronger than the probability of low rains, and the quantum of rise in temperatures during El Nino years is rising. What could be worrying is that rising temperatures have an adverse impact across crops.
“Perishables like vegetables and fruits are traditionally more sensitive to heatwaves, and this sensitivity is rising. Durable crops like cereals, pulses, oilseeds, and sugar are not too far behind as old temperature thresholds are breached. Even animal protein sources are becoming more sensitive to heat,” pointed Bhandari and Chaudhary.
Already, India’s economy is bracing for an impact from a surge in oil prices and supply chain disruptions due to the US and Israel war on Iran. With the energy and El Nino shocks coinciding, the outlook for FY27 will need close attention.
HSBC’s model suggests the El Nino/temperature could add 0.5 percentage point to inflation over a year. With this, coupled with the energy shock, including potential fuel price increases, HSBC economists now see headline inflation averaging 5.6% this financial year, which is very close to the upper end of the targeted band of 4%, plus or minus 2%. The HSBC forecast is also higher than the RBI’s CPI (consumer price index) inflation forecast of 4.6 for the full year.
The accompanying growth shock will likely stop the central bank from increasing rates further beyond two, feel Bhandari and Chaudhary. They forecast GDP to grow 6% in FY27, lower than the last year’s forecast of 7.4%. The HSBC growth forecast is also significantly lower than the 6.9% growth that RBI has projected for the current financial year.
The informal sector — rural households and small firms — are likely to bear the brunt of this shock, and that could mark a change in India's drivers of growth, the economists added.