Inflation & currency pressures mount: Will RBI hike rates in FY27? Economists weigh in

In December 2025, announcing the monetary policy, Sanjay Malhotra, the Reserve Bank of India Governor said the economy was in a “rare goldilocks period.” After all CPI (consumer price index) inflation was benign then, even as growth was strong at around 8%. In February 2026, Malhotra stated Indian economy was in a “good spot,” pointing to strong growth and low inflation.

As he gets ready to announce the monetary policy next week on April 8, the conflict in West Asia has dramatically altered the situation and the central bank is now faced with a rapidly depreciating rupee, and increasing uncertainty around growth and inflation as the US and Israel war against Iran drags on. The conflict has led to a surge in oil prices to $100 a barrel and disrupted natural gas supplies, which has hurt several industries. The West Asian region also accounts for a third of remittances and nearly 15 per cent of exports, compounding matters.

The monetary policy committee (MPC) was largely expected to leave interest rates unchanged in the first MPC meeting of the 2026-27 financial year, having cumulatively reduced the repo rate by 125 bps to 5.25% from 6.50% over 2025. However, now some have begun to wonder if there will be a need to raise interest rates this year, if the conflict prolongs and that drives up inflation. More importantly, the central bank will also be expected to take further steps to shore up the rupee, which declined 4% against the US dollar in March.

The Economic Survey this year had projected India’s GDP to grow in the 6.8-7.2% range in FY27. The estimates were revised upwards in February to 7.0-7.4%. Chief Economic Advisor V. Anantha Nageswaran, though, warned recently that there was a “considerable downside” to the growth expectations.   

Sonal Badhan, economist at Bank of Baroda, expects the MPC to keep the policy repo rate unchanged at 5.25%, while also maintaining the stance at neutral. Importantly, she feels this policy should mark the end of the rate cut cycle.

“Impact of war on growth and inflation will become clearer in the next 3-4 months. RBI is likely to then take a call on the direction of its rate trajectory. If inflation overshoots its upper band of tolerance (6%), then there will be a chance of rate hike towards the end of the year,” said Badhan.

Rajani Sinha, chief economist at CareEdge Ratings is also expecting the MPC to keep interest rates on hold this time. The immediate effects of higher global crude oil prices are expected to remain somewhat contained with the price increase burden being shared by the oil marketing companies, she noted.

“The moderation in domestic growth prospects and heightened inflation risks amid the highly volatile global landscape have complicated the RBI’s policy trade-offs, warranting a careful balance between supporting growth impulses and containing inflation pressures,” said Sinha.

Rupee worries

The rupee had been depreciating against the US dollar over 2025 and the conflict has only added to the downward pressures. Heavy selling by foreign portfolio investors has also weighed adversely on the currency. On March 30, the rupee hit an intraday low of 95.21 against the greenback, and closed at a record low of 94.83, forcing the Reserve Bank to step in with measures to stem the slide.

Late on Wednesday, the Reserve Bank barred banks from offering rupee non-deliverable forward (NDF) contracts to corporate clients a move aimed at curbing speculative activity. NDF is a financial derivative used to hedge or speculate on currency exchange rates.

The move had its desired effect, with the rupee strengthening by 1.6% to 93.10 against the dollar on Thursday. Analysts say more measures efforts towards supporting the rupee and ensuring liquidity in the system could be expected in the MPC meet next week.

  “Weakness in foreign investment flows, pressures on the current account deficit and global risk-off sentiment have kept the rupee under pressure,” said Sinha of CareEdge, who feels the rupee was significantly underwalued at the end of February in terms of real effective exchange rate, suggesting that should global conditions improve, the rupee could appreciate.

 She expects the rupee to average 92-93 if the conflict ends soon and oil averages around $90 a barrel through FY27. However, if the conflict were to intensify, the weakening pressure on the rupee may persist, Sinha added.

Economists at SBI Mutual Fund note that if foreign institutional investor flows fail to revive, the rupee will remain vulnerable to global shocks. They are expecting a 4-5% depreciation in 2026, more than earlier expected 2-3% fall. They are also expecting the real GDP growth to moderate to around 6.9% in the current financial year from 7.8% in FY26.

They expect the RBI to keep rates on hold, given the downside risks to growth and manufacturing activity.

“Current oil prices are 50% above RBI’s assumption of $70 per barrel. Despite this, the we continue to see a high bar for monetary tightening. Growth risks appear underpriced, and the policy mix is likely to tilt decisively towards fiscal rather than monetary measures in a stagflationary environment,” the SBI MF economists said.