According to UBS Securities India, the Reserve Bank of India could raise rates by 50-75 basis points cumulatively in the remainder of fiscal year 2027 (FY27), helping contain inflation expectations without materially derailing India's consumption story. As reported by CNBC TV18, Dhiraj Agarwal, Managing Director - Group CEO's Office at Ambit, warns that the central bank's monetary policy trajectory could pose severe risks to the broader market if the bank opts for four rate hikes. While the market can digest up to three hikes, a fourth could derail the recent recovery in credit growth and dampen overall sentiment. Agarwal noted that two to three rate hikes will be margin accretive for banks in the near term, as rate hikes immediately filter into lending rates while deposit costs filter in with a lag.
Goldman Sachs Chief India Economist Santanu Sengupta expects the RBI to raise interest rates three more times by June 2027, totaling about 75 basis points, with hikes projected for December, February, and either April or June. As reported by NDTV Profit, Sengupta warned that El Nino poses a material downside risk to growth and an upside risk to inflation in 2027. He noted that current inventory levels will help contain inflationary pressures for the immediate future, but El Nino lower reservoir levels may harm the rabi harvest and with diminished stock levels by 2027, inflation could accelerate. The economist stressed that El Nino has yet to be fully accounted for by many financial market participants as climate threats pose a greater risk for 2027 than for 2023. He flagged crude oil as the biggest risk, saying sustained $100-plus oil would represent a greater impediment to economic growth and inflation.
As reported by CNBC TV18, Agarwal warned that four hikes could derail multiple sectors, including real estate and consumer discretionary demand, while severely impacting credit growth. He pointed out that credit growth had fallen to the 10 to 11% range just three quarters ago before rebounding to the 16 to 18% bracket recently. According to UBS, UBS' global oil team now expects Brent crude to average $95 a barrel in FY27, up from $85 a barrel previously, amid the conflict in West Asia. The analyst believes that four rate hikes could seriously derail the overall growth outlook and hence the entire market, potentially coinciding with US 10-year yields crossing 6%, triggering a global risk-off trade. However, UBS expects that a 50-75 bps rate-hike cycle will not materially derail household consumption, with external headwinds like higher oil prices and weather disruptions weighing more on consumer sentiment.
According to the CNBC TV18 report, Agarwal expressed a clear preference for discretionary consumption stocks over staples, highlighting that staples are already highly penetrated and losing their historical distribution advantage to new direct-to-consumer internet brands. He noted that consumers in small towns can now purchase these brands online without companies needing to replicate the massive distribution networks of giants like Unilever or Nestle. In the automobile sector, he argued that the primary concern is not interest rates but whether volume numbers can sustain once the goods and services tax (GST) stimulus impact wears off in the December quarter. UBS maintains that inflation risks remain elevated due to uncertainty surrounding summer crop yields and the winter (rabi) crop outlook amid below-normal reservoir levels, with the most significant impact on global food prices expected during 2027 and early 2028. Goldman Sachs notes that there is little additional scope for stimulating the economy through either GST cuts or income tax cuts.
As reported by CNBC TV18, assuming the central bank stops at three hikes, Agarwal believes the market will avoid structural damage, though it may experience a slight bit of stress. The outlook will also depend on credit growth, oil prices and demand after the GST stimulus fades. Goldman Sachs projects that India should still manage roughly 7 percent economic growth, which is impressive considering India's status as an oil importer operating within the current global climate. UBS continues to forecast FY27 real GDP growth of 7.2%, broadly in line with the RBI's revised projections, despite expecting growth to moderate in H2FY27. For real estate, Agarwal observed a mixed demand trajectory across different micro-markets, noting it is no longer as uniformly strong as it was a year to a year and a half ago. Goldman Sachs expects growth to moderate in H2FY27 as tighter global financial conditions, elevated oil-price volatility and the lagged effects of weaker rainfall weigh on activity.
