The case for a rate hike has grown stronger. But here’s why the RBI MPC may still just wait
Economists say the monetary policy committee may want wait-and-watch to assess geopolitical developments, inflation pass through and the pressure on rupee.
- Jun 1, 2026,
- Updated Jun 1, 2026 4:24 PM IST
If you are a borrower, you must be wondering if the interest rate will rise or fall going ahead.
Well, amid the ongoing conflict in West Asia, the rupee has been under pressure this year, oil prices have been on the boil and inflation risks have risen. However, risks to economic growth are also high, as supply chain disruptions hit several sectors.
For the Reserve Bank of India’s monetary policy committee (MPC) that meets this week, it’s a tightrope walk navigating between keeping inflation under control and also supporting growth.
In this backdrop, while there is a growing case for a hike in the repo rate, the MPC may still decide to keep it on hold on June 5 as it may want to assess the developing situation in West Asia, any signs of truce between the US and Iran, which could have a bearing on oil and gas prices over the course of the year.
In 2025, the MPC reduced the benchmark rate at which it lends money to commercial banks to 5.25% from 6.5%. In the last meeting in April, the MPC unanimously voted to keep the repo rate unchanged.
At the time, RBI Governor Sanjay Malhotra noted that the West Asia conflict posed challenges to the Indian economy through a number of channels—exports, supply of critical commodities, elevated energy and other commodity prices, remittances, uncertainty, subdued global demand, etc. But he also pointed out that despite these challenges, the outlook for 2026-27 remained cautiously positive with services, agriculture, and healthy balance sheets continuing to support growth.
Since then, inflation risks have only gone up. Wholesale inflation surged to 8.3% in April, the highest level in 3.5 years.
The rupee fell to a record low of 96.96 against the US dollar before recovering to a little above 95 on June 1, aided by RBI interventions and some decline in oil prices amid hopes of a truce between US and Iran. Generally, many economists and fund managers now see a growing chance that the RBI may raise the repo rate by at least 50 basis points through the course of the current financial year if the war prolongs and pushes growth downwards and inflation upwards. But the hike may not come immediately in June.
“We expect the MPC to adopt a wait-and-watch approach amid external volatility, assessing whether current price pressures are transient or persistent based on external developments. The current uptick in inflation is a supply shock and not demand driven,” noted Rajani Sinha, chief economist at CareEdge Ratings.
She pointed out that the future trajectory of the policy rate will depend on the MPC’s assessment of evolving inflation dynamics, which are being significantly influenced by external factors. If the MPC feels the current inflationary pressure is transient, then it may want to look through the near-term spike. However, should the war drag on or escalate further in coming months, then the risks will only rise. Also, there are emerging growth risks that the central bank will be closely watching too.
CareEdge estimates are that the GDP in FY27 will grow at 6.7%, assuming crude oil will average around $90 per barrel. But, in case of a lengthy conflict and crude averaging $110 per barrel, growth could sharply slow to 6%.
There are also risks stemming from the expected El Nino conditions this year that may lead to lower rainfall and hurt agricultural output. The India Meteorological Department recently revised its monsoon forecast, estimating that rainfall could be 90% of the long-period average, potentially making it among the driest years this decade.
“The sharp decline in crude prices (down 21.8% in May to $91 per barrel) in expectation of a US-Iran MoU has obviated the need for emergency rupee defence measures. The currency has gained 2% to 95 per dollar after touching 96.96 on 20 May. We believe that the re-opening of the Strait of Hormuz (now appearing imminent) should drive Brent back to $75-80 per barrel and provide considerable relief to the rupee. Against this backdrop, we see no need for the RBI to raise rates, even as inflation firms to 4.5% due to 7% spike in petrol and diesel pump prices,” Seshadri Sen, head of research and strategist at Emkay Global Financial Services, opined.
Radhika Rao, senior economist and executive director at Singapore’s DBS Bank believes the MPC will likely prioritise its key mandate of keeping inflation in check, while relying on other instruments to stabilise the currency.
“Headline CPI inflation is tracking the midpoint of the 2-6% target range in May, after a below consensus print in April. Fuel prices have been raised, but the cumulative increase of around 7% is measured. In the absence of significant spillovers into core inflation as yet and with inflation expectations still broadly anchored, the central bank might reason that the second-round effects are not evident at this juncture, backing a wait-and-watch approach,” said Rao.
Still the case of rate hikes has strengthened, with a higher likelihood of a shift in the second half of the year. “As global rates rise, a rate hike will be needed to attract rate sensitive flows if the conflict continues,” according to Rao.
Economists at DMI Finance also expect the RBI to keep the repo rate on hold. However, the possibility of monetary tightening in the second half of the fiscal, or sooner, may rise should energy disruptions persist, inflation expectations shift or rupee pressures intensify, they said.
If you are a borrower, you must be wondering if the interest rate will rise or fall going ahead.
Well, amid the ongoing conflict in West Asia, the rupee has been under pressure this year, oil prices have been on the boil and inflation risks have risen. However, risks to economic growth are also high, as supply chain disruptions hit several sectors.
For the Reserve Bank of India’s monetary policy committee (MPC) that meets this week, it’s a tightrope walk navigating between keeping inflation under control and also supporting growth.
In this backdrop, while there is a growing case for a hike in the repo rate, the MPC may still decide to keep it on hold on June 5 as it may want to assess the developing situation in West Asia, any signs of truce between the US and Iran, which could have a bearing on oil and gas prices over the course of the year.
In 2025, the MPC reduced the benchmark rate at which it lends money to commercial banks to 5.25% from 6.5%. In the last meeting in April, the MPC unanimously voted to keep the repo rate unchanged.
At the time, RBI Governor Sanjay Malhotra noted that the West Asia conflict posed challenges to the Indian economy through a number of channels—exports, supply of critical commodities, elevated energy and other commodity prices, remittances, uncertainty, subdued global demand, etc. But he also pointed out that despite these challenges, the outlook for 2026-27 remained cautiously positive with services, agriculture, and healthy balance sheets continuing to support growth.
Since then, inflation risks have only gone up. Wholesale inflation surged to 8.3% in April, the highest level in 3.5 years.
The rupee fell to a record low of 96.96 against the US dollar before recovering to a little above 95 on June 1, aided by RBI interventions and some decline in oil prices amid hopes of a truce between US and Iran. Generally, many economists and fund managers now see a growing chance that the RBI may raise the repo rate by at least 50 basis points through the course of the current financial year if the war prolongs and pushes growth downwards and inflation upwards. But the hike may not come immediately in June.
“We expect the MPC to adopt a wait-and-watch approach amid external volatility, assessing whether current price pressures are transient or persistent based on external developments. The current uptick in inflation is a supply shock and not demand driven,” noted Rajani Sinha, chief economist at CareEdge Ratings.
She pointed out that the future trajectory of the policy rate will depend on the MPC’s assessment of evolving inflation dynamics, which are being significantly influenced by external factors. If the MPC feels the current inflationary pressure is transient, then it may want to look through the near-term spike. However, should the war drag on or escalate further in coming months, then the risks will only rise. Also, there are emerging growth risks that the central bank will be closely watching too.
CareEdge estimates are that the GDP in FY27 will grow at 6.7%, assuming crude oil will average around $90 per barrel. But, in case of a lengthy conflict and crude averaging $110 per barrel, growth could sharply slow to 6%.
There are also risks stemming from the expected El Nino conditions this year that may lead to lower rainfall and hurt agricultural output. The India Meteorological Department recently revised its monsoon forecast, estimating that rainfall could be 90% of the long-period average, potentially making it among the driest years this decade.
“The sharp decline in crude prices (down 21.8% in May to $91 per barrel) in expectation of a US-Iran MoU has obviated the need for emergency rupee defence measures. The currency has gained 2% to 95 per dollar after touching 96.96 on 20 May. We believe that the re-opening of the Strait of Hormuz (now appearing imminent) should drive Brent back to $75-80 per barrel and provide considerable relief to the rupee. Against this backdrop, we see no need for the RBI to raise rates, even as inflation firms to 4.5% due to 7% spike in petrol and diesel pump prices,” Seshadri Sen, head of research and strategist at Emkay Global Financial Services, opined.
Radhika Rao, senior economist and executive director at Singapore’s DBS Bank believes the MPC will likely prioritise its key mandate of keeping inflation in check, while relying on other instruments to stabilise the currency.
“Headline CPI inflation is tracking the midpoint of the 2-6% target range in May, after a below consensus print in April. Fuel prices have been raised, but the cumulative increase of around 7% is measured. In the absence of significant spillovers into core inflation as yet and with inflation expectations still broadly anchored, the central bank might reason that the second-round effects are not evident at this juncture, backing a wait-and-watch approach,” said Rao.
Still the case of rate hikes has strengthened, with a higher likelihood of a shift in the second half of the year. “As global rates rise, a rate hike will be needed to attract rate sensitive flows if the conflict continues,” according to Rao.
Economists at DMI Finance also expect the RBI to keep the repo rate on hold. However, the possibility of monetary tightening in the second half of the fiscal, or sooner, may rise should energy disruptions persist, inflation expectations shift or rupee pressures intensify, they said.