The Reserve Bank of India's six-member Monetary Policy Committee, headed by RBI Governor Sanjay Malhotra, is expected to maintain the key policy rate at 5.25% when it announces its decision on June 5 after three days of deliberations. According to The Economic Times, a majority of economists polled predict the RBI will hold its policy rate steady at the upcoming June meeting, with eleven of the 15 economists in the survey predicting a pause on the repo rate, while four forecast a 25-basis point increase. For the fiscal year, 13 of them expect a cumulative rate hike of 50-75 basis points, with the other two seeing the central bank extending its pause through the year. The MPC had left the policy rate unchanged at 5.25% by a unanimous decision and decided to continue with a neutral stance at the April policy. SBI Research maintains its preference for status quo on policy rates, arguing that the RBI has alternative tools to manage currency volatility without tightening benchmark interest rates. Madan Sabnavis, Chief Economist at Bank of Baroda, does not expect any change in the repo rate or stance next week, but expects the RBI to increase inflation forecast towards 5% and lower GDP estimate more towards 6.5% from 6.9%. Citi has brought forward its rate hike views following fuel price hikes that exceeded its base case assumptions, with the cumulative ₹7.5 per litre increase in petrol and diesel prices last month prompting the brokerage to revise its FY27 average inflation forecast upward to 4.9% from 4.6%, while expecting two 25 basis point hikes in August and October. DBS Group's Taimur Baig expects modest rate adjustments of not more than 50 basis points over the next six to 12 months.
The Indian banking sector faces a significant profitability decline in FY26, with return on assets (RoA) expected to slip 10-15 basis points to 1.1-1.2% this fiscal from around 1.3% last fiscal, according to Crisil Ratings. This moderation stems primarily from lower treasury income as bond yields normalise and higher provisions by banks ahead of the expected credit loss (ECL) framework implementation from April 1, 2027. Despite the decline, sectoral RoA will remain well above the 20-year average of 0.8% and 10-year average of 0.6%, indicating the sector remains fundamentally strong. Net interest margins (NIMs) are expected to remain stable at around 2.9% this fiscal, after declining 20 basis points last year, with the cost of liabilities having likely bottomed out. As per Crisil Ratings, outstanding deposit rates fell ~50 bps against a decrease of ~80 bps in lending rates last fiscal, following a cumulative repo rate cut of 125 bps, though the cost of liabilities has likely bottomed out.
SBI's economic research department has revised the full-year FY27 inflation projection to 5-5.1%, with risks tilted to the upside, according to The Times of India. The report expects the consumer price index (CPI) trajectory may indicate more than 5% inflation for the next three quarters (current quarter at 4 to 4.1%). May's imported inflation is projected to jump to 7.3%, making matters worse for inflation. The full-year FY27 GDP growth rate is now cast at 6.6%, subject to revisions due to ongoing geopolitical uncertainties, with Madan Sabnavis, Chief Economist at Bank of Baroda, expecting the RBI to lower that for GDP to around 6.5% from 6.9%. Anubhuti Sahay, head of India economic research at Standard Chartered Bank, also expects a 25-bp hike and projected the RBI to revise its inflation projection to 4.9% for FY27. SBI Research remains optimistic about India's growth trajectory, expecting real GDP growth to come in at around 7.2 per cent in the fourth quarter of FY26, with full-year FY26 growth projected at 7.5 per cent. Looking ahead, the report estimates India's GDP growth at 6.6 per cent in FY27, though it cautioned that geopolitical tensions, commodity price fluctuations and other global developments continue to pose risks to the economic outlook.
The Indian rupee has depreciated significantly since the April policy, closing at ₹95 per dollar on Friday after hitting a high of ₹94.96, compared to ₹92.58 on April 8. The rupee has depreciated well over 6% in 2026 - its worst performance in a decade, creating significant pressure on the central bank. The rupee declined nearly 11% in FY26 and another over 3% in FY27 so far, as per The Economic Times. India's foreign exchange reserves have dropped from over $700 billion on April 10 to around $681 billion on May 22, with the RBI conducting dollar sales to manage forex volatility. The liquidity in the system has fallen dramatically from ₹4.3 trillion in April to just ₹55,000 crore now, as the RBI conducts buy-sell swaps to balance liquidity. The 10-year bond yield has oscillated between 6.90% and 7.14%, while the gap between US and Indian 10-year treasury yields has compressed from 2.61 percentage points to 2.52 percentage points, creating disincentives for foreign investment. The central government is borrowing at 6.7% for four-year money, 7.06% for 7-year bonds, and 7.67% for 30-year bonds, while state governments pay even higher rates of 7.78% for nine-year bonds and 7.87% for 18-year bonds. SBI Research argues that the RBI can effectively manage rupee pressure through targeted liquidity interventions and short-term interest rate measures rather than raising the repo rate. The report suggests similar liquidity-focused measures can prove effective without altering the benchmark policy rate, citing the RBI's response during the 2013 currency volatility episode when it sharply increased the Marginal Standing Facility (MSF) rate by 200 basis points to 10.25 percent and widened the policy corridor, while leaving the reverse repo rate unchanged.
The Reserve Bank of India (RBI) has outlined an ambitious agenda for FY27, featuring a comprehensive review of the RBI Act and major technology upgrades to strengthen central banking operations. According to The Times of India, the central bank will roll out the next-generation core banking system e-Kuber 3.0, develop an alternate payment system, and create a unified enterprise platform to enhance operational efficiency. The RBI will also build an institution-grade AI ecosystem to support central banking functions, marking a significant step toward modernizing India's central banking infrastructure. On the external front, the RBI will support India's leadership role in the BRICS finance track and work on a currency swap framework for SAARC nations, while focusing on diversifying foreign exchange reserves to optimise returns amid rising geopolitical risks. In its annual report released on Friday, the RBI said it will be reviewing and improving GDP growth and inflation forecasting during the current financial year.
The RBI's regulatory agenda in FY27 is anchored around two key priorities: customer protection and strengthening the credit ecosystem. On customer protection, the central bank will strengthen the KYC (Know-Your-Customer) framework, extend video-based identification to NRI (Non-Resident Indian) customers, and review responsible business conduct directions, according to its latest annual report. For credit ecosystem enhancement, the RBI has proposed review of directions on interest rates, credit risk management and market mechanisms for transfer and distribution of credit risk, along with a new framework for shared loan arrangements. To enable banks to focus on strategy and risk governance, the RBI will rationalise requirements for placing matters before Board meetings and strengthen supervisory practices through early identification of emerging risks, enhanced root-cause analysis, and improved consistency across regulated entities. The supervisory agenda will also involve reviewing risk-based approach for KYC/AML supervision of Scheduled Commercial Banks and strengthening data-driven supervision through micro-data analytics.
Despite external uncertainties, India's economy is expected to expand 6.9% in FY27 despite rising risks from the conflict in West Asia, with domestic demand and investment activity continuing to support growth. The RBI's GDP forecast for FY27 is higher than the International Monetary Fund's projection of 6.5% for the same period. The central bank said India remained resilient through FY26 and continued to be one of the fastest-growing major economies, with real gross domestic product growing 7.6% in FY26. Growth prospects are supported by India's strong macroeconomic fundamentals, including robust domestic demand, relatively lower dependence on exports as a growth driver, and a stable policy environment, according to the RBI annual report. Growth is projected at 6.9% in FY27, with quarterly growth projected at 6.8% in the first quarter, 6.7% in the second quarter, 7.0% in the third quarter and 7.2% in the final quarter. The RBI expects growth to remain broadly stable through the year, with risks to the outlook remaining tilted to the downside. DBS Group's Taimur Baig emphasizes that India's economy, consumers and companies are far less fragile than feared and can adapt to external shocks over time, noting that the world, including India, has dealt with energy shocks before - oil touched $150 per barrel around 16 years ago, and life did not end. Bank of America described the RBI as 'staring at a difficult policy backdrop,' noting that a hold is likely the most logical choice for June even as strong arguments exist in favour of a hike, with the external environment remaining 'highly uncomfortable'.
