RBI Monetary Policy: The Reserve Bank of India (RBI) is set to announce its June monetary policy decision tomorrow, 5 June, at a time when investors are grappling with rising crude oil prices, a weakening rupee and mounting uncertainty stemming from the ongoing conflict in West Asia.
The six-member Monetary Policy Committee (MPC), chaired by RBI Governor Sanjay Malhotra, began its three-day meeting on June 3 and will unveil its decision at 10 a.m. on June 5. The policy outcome is being closely watched for clues on the future direction of interest rates, inflation and economic growth.
At its previous meeting in April, the MPC unanimously decided to keep the repo rate unchanged at 5.25% while retaining a neutral policy stance. The Standing Deposit Facility (SDF) rate was maintained at 5%, while the Marginal Standing Facility (MSF) rate remained at 5.5%.
Since the start of the Middle East conflict earlier this year, global crude oil prices have risen sharply, putting pressure on India’s inflation outlook and weakening the rupee to record lows. As the world’s third-largest crude oil importer, India remains particularly vulnerable to sustained increases in energy prices, which could fuel imported inflation and complicate the RBI’s policy choices.
Economists Split on RBI’s Next Move
While most economists continue to expect a status quo on interest rates, some market indicators have started pricing in the possibility of a rate hike. As a result, traders across equity, bond and currency markets are preparing for multiple policy outcomes. While a no rate hike, no stance change is already factored in by the markets, here are some other outcomes amd their impact.
Madan Sabnavis, Chief Economist at Bank of Baroda, expects the RBI to leave rates unchanged while adopting a more cautious tone and revising its macroeconomic projections.
“We do not expect any change in repo rate or stance this time. However, the tone will be cautious, leaning towards being hawkish. We can expect RBI to increase its inflation forecast towards 5% and lower that for GDP to around 6.5% from 6.9%,” Sabnavis said.
A hawkish pause could keep equity markets relatively stable in the near term, although higher inflation projections may reinforce expectations of tighter monetary policy later in FY27. Currency traders believe the rupee could remain under some pressure, though any sharp movement may be tempered by RBI intervention. Bond market participants expect only limited movement in yields, with shorter-duration bonds likely to outperform longer-tenure securities amid inflation concerns.
A similar view on rates has been expressed by Sugandha Sachdeva, Founder of SS WealthStreet. She expects the central bank to prioritise inflation management and currency stability while maintaining its focus on growth amid a challenging global backdrop.
Meanwhile, Hitesh Suvarna, Economist at JM Financial, believes there is limited justification for policy tightening at this stage despite inflation risks arising from evolving El Niño conditions, heatwaves and the possibility of a below-normal monsoon. He expects the RBI to raise its inflation projection by 20 basis points to 4.8% for FY27 while lowering its growth estimate by 10 basis points to 6.8%.
Not everyone, however, is expecting a pause.
Puneet Pal, Head-Fixed Income at PGIM India Mutual Fund, believes the MPC could raise the repo rate by 25 basis points to 5.50%. He expects the benchmark 10-year government bond yield to trade within a broad range of 6.85% to 7.25% over the next month.
“A lasting ceasefire or end of hostilities in the Middle East will be the key determinant of the short-term evolution of the yield curve, given its impact on inflation, fiscal deficit and GDP growth,” Pal said.
If the RBI delivers a 25 basis point rate hike without changing its policy stance, analysts believe the move could support the rupee by reinforcing confidence in the central bank’s commitment to containing inflation. However, eqities are expeccted to react negatively in such a situation. Bond yields, meanwhile, are expected to remain relatively contained, although equities could witness some selling pressure, particularly in rate-sensitive sectors such as banking, real estate and consumer discretionary.
With inflation, crude oil prices, monsoon trends and geopolitical developments all influencing the outlook, Friday’s RBI policy decision is expected to be one of the most closely watched events for Indian financial markets this year.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
