The Reserve Bank of India is expected to tighten monetary policy in the coming months, bringing it in line with regional peers that have turned more hawkish in response to inflationary pressures stemming from the West Asia conflict. Following Governor Sanjay Malhotra's signal on Friday that policymakers could raise interest rates if inflation pressures become more generalised and persistent, the central bank lifted its inflation forecast for the fiscal year ending March 2027 to 5.1% from 4.6%. According to HSBC Holdings chief India economist Pranjul Bhandari, the RBI's commentary on inflation 'opens the door for rate hikes in the next meeting' in August, which would mark the RBI's first rate hike since February 2023. Bhandari has brought forward her forecast for tightening and now expects rate increases in August and October, instead of in the final three months of 2026 and the first quarter of 2027.
Multiple major banks have revised their rate hike forecasts significantly upward. Deutsche Bank AG and Goldman Sachs Group Inc. are penciling in 50 basis points of rate hikes each in the final months of 2026, taking the RBI's key rate to 5.75%. Oversea-Chinese Banking Corp. expects cumulative 50 basis points of increases in the current financial year, ending in April 2027. Deutsche Bank's Kaushik Das expects the RBI to first shift its policy stance to 'withdrawal of accommodation' in August before delivering quarter-point hikes each in October and December, with the repo rate eventually climbing to 6.25% by mid-2027. However, Nomura Holding Inc.'s chief economist Sonal Varma still expects the RBI to tread carefully, noting that 'the trigger for the RBI to hike rates is essentially a generalization of price pressures' and that headline inflation is expected to rise but will take time for the RBI to respond.
Reliance Industries' treasury department is actively exploring strategies to manage its substantial cash reserves ahead of potential interest rate increases by the Reserve Bank of India. According to reports from Bloomberg and The Hindu BusinessLine, traders are strategizing over where to park the company's cash in case the RBI starts raising rates in the coming months. The company's discussions precede the upcoming RBI rate decision, with markets currently expecting approximately 50 basis points of rate hikes this year. One proposal involves moving Reliance's cash holdings from liquid mutual funds into short-dated money market instruments, as reported by Business Standard citing people aware of the conglomerate's thinking. The switch may pay off because the yield spread between money-market papers and the benchmark rate has widened beyond its five-year average and is likely to narrow in coming months, resulting in potential capital gains.
Indian government bonds are expected to open the week on a quiet note as focus turns to the central bank's Friday monetary policy decision, with the yield on the benchmark 6.48% 2035 note expected to trade in the 6.97% to 7.02% range, according to a private bank trader. The bond yield had ended at 7.0037% on Friday, down 6 basis points in its biggest weekly drop in seven weeks. Nearly 80% of economists in a Reuters poll expect the repo rate to remain unchanged at the RBI's decision on June 5, despite rising calls for rate hikes from some quarters. Standard Chartered, Capital Economics, ANZ, MUFG and OCBC are among the minority calling for an interest rate increase. The bond market consolidation reflects the uncertainty ahead of the central bank's policy announcement.
The rupee has declined 6% this year and recently approached a record low of 97 per dollar, though it has been hovering around these levels in recent days. As reported by Bloomberg and The Hindu BusinessLine, Reliance's traders expect the rupee to strengthen if a Middle East peace deal is reached and if the RBI takes measures to attract capital inflows. The currency faces additional pressure from the Middle East energy shock, with BofA Securities anticipating a potential record low of 98 against the dollar by July. India's sovereign bond yields have remained broadly stable this quarter even as the rupee has slid to record lows, with the currency recovering in recent days helped by RBI intervention and optimism that a US and Iran agreement may lead to the reopening of the Strait of Hormuz, a vital route for the country's energy imports. Reliance's traders have proposed that the owner of the world's largest oil-refining complex partly hedge its long-term forward contract positions as well as coupon payments dues in the fiscal year starting March 2028.
A Reliance Industries spokesperson categorically denied the information regarding the company's opinion on interest rates and rupee behavior, stating by email that the company 'categorically deny the information you have provided in your email regarding our opinion on interest rates and the behaviour of the rupee,' as reported by Bloomberg and The Hindu BusinessLine. The denial carries significant weight given that Reliance runs one of India's largest corporate treasuries. The view carries weight because Reliance runs one of the largest corporate treasuries in India.
