HSBC expects the Reserve Bank of India (RBI) to raise interest rates twice in FY27 due to inflationary pressures arising from rising energy prices and the possible impact of El Nino weather conditions. According to the latest report, the RBI is likely to deliver rate hikes in the December and March quarters as it sees the possibility of an increase in inflation. The brokerage forecasts two 25-basis-point rate hikes in FY27, potentially bringing the repo rate to 5.75% from the current 5.50%. The report predicts headline inflation will average 5.6% for the fiscal year, with at least two quarters where the headline inflation number is likely to shoot beyond the 6% mark, which is the upper tolerance of the central bank. If the hikes do not happen, the average inflation for FY27 will come at 5.3%. The modelling suggests the RBI will raise the repo rate by 50 basis points in two stages during the fourth quarter of FY26 and the first quarter of FY27, taking the policy rate to 5.75%. HSBC has also accounted for up to ₹7 hike per litre on petrol and diesel prices to address the pain of oil marketers, who are reportedly suffering losses of up to ₹30,000 crore per year.
The report highlighted that the overlap of multiple shocks, including energy, industrial feedstock costs and a likely El Niño event, has increased concerns over inflation and economic growth. As reported by HSBC, forecasts show a 60% chance of El Niño developing by Q3 2026, potentially disrupting monsoon rains and affecting agricultural output, which is key for food inflation in India. If El Niño conditions emerge later in 2026, a large part of the inflationary impact may be felt in 2027, with a severe El Niño event potentially leading to even sharper increases in food prices. Global crude oil prices near $100 per barrel are a major inflationary factor, supported by the conflict in West Asia, adding to the pressure on food prices. The modelling in the note suggests that the El Niño-temperature channel could add roughly 0.5 percentage points to inflation over a 12-month period, on top of the pass-through from higher energy prices. HSBC economists argued that the probability of high temperatures is stronger than the probability of low rains, and the quantum of rise in temperatures during El Niño years is rising. The brokerage noted that tracking surface temperature is enough to get a good sense of where food inflation is headed and added that one may not even want to track rains in most parts. Citing past instances, it explained that an El Niño year is associated with low rains, high temperatures, higher food inflation, and lower growth.
Despite the expected inflation rise, HSBC said the RBI may avoid aggressive rate hikes because economic growth is also likely to slow down. The report projected India's GDP growth at 6% in FY27, which is a sharp drop from HSBC's earlier forecast of 7.4%. Other institutions predict growth between 5.8% and 6.2%, indicating a general expectation of a slowdown. According to the report, bringing together both the shocks, and factoring in some fiscal slippage, we forecast GDP to grow 6% in FY27, lower than our previous year's forecast of 7.4%. The Reserve Bank expects GDP growth to come in at 6.9% for 2026-27 as per an estimate released last month. The report projected India's GDP growth at 6% in FY27, which is a sharp drop from HSBC's earlier forecast of 7.4%. The shocks will also stoke inflation, and may prod the Reserve Bank to hike key lending rates twice in the current fiscal. The research team noted that the central bank may therefore avoid aggressive tightening, balancing the need to control inflation with the risk of a further growth slowdown. The twin shocks are expected to weigh on consumer demand and business sentiment, with higher interest rates and inflation potentially leading to more unemployment and lower consumer spending.
The report warned that the ongoing rise in energy prices, combined with industrial cost pressures and climate-related disruptions, could create a difficult macroeconomic environment for policymakers during FY27. HSBC stated that the RBI will likely have to balance inflation control with growth concerns while deciding its future monetary policy actions. The report noted that historically, India's monetary tightening has led to higher bond yields and required close attention to currency stability. A key risk is that policy errors could worsen stagflation – a mix of high inflation and low growth. Rate hikes, meant to curb inflation, could slow the economy when it's already weakening. The report pointed out that unlike wealthier nations with stronger social support, a significant downturn in India's informal sector could lead to wider social and economic instability. The emerging crises will be a major blow to the formal sector, including rural households and small firms, with the conflict in West Asia leading to a sharp surge in oil prices continuing to trade above USD 100 per barrel.
