At its second meeting of FY27, and in line with expectations, the RBI’s Monetary Policy Committee (MPC) left the repo rate unchanged at 5.25%. Accordingly, the SDF and MSF rates were retained at 5.00% and 5.50%, respectively. In addition, MPC unanimously voted to retain the ‘neutral’ policy stance.

RBI’s macroeconomic projections

The forecast for FY27 GDP growth was pared by 30 bps to 6.6%. 

• Projections for all 4 quarters were marked down.
• Growth forecast for Q1 FY27 and Q2 FY27 were revised lower by 20 bps and 40 bps, to 6.6% and 6.3%, respectively. 
• Forecast for Q3 and Q4 were marked down by 50 bps and 40 bps each, to 6.5% and 6.8%, respectively.

On the other hand, CPI inflation trajectory for FY27 was revised notably upward by 50 bps to 5.1%.

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• Projection for Q1 was revised upward by 20 bps to 4.2%.
• Forecast for Q2, Q3 and Q4 were each marked up by 70 bps, to 5.1%, 5.9% and 5.4%, respectively.   
• FY27 core CPI inflation forecast was also revised higher by 30 bps to 4.7%.

Amidst the recent sustained depreciating pressure on the INR (~5% over Mar-May-26) amid BoP pressures, Governor reaffirmed RBI’s heightened vigilance and preparedness to do whatever it takes to preserve orderly market conditions. As such, the Governor unveiled a series of durable and short-term policy measures aimed at facilitating foreign exchange inflows, including-

• Enhanced foreign participation in longer-tenor g-secs including 15Y, 30Y and 40Y, under the FAR route
• Removal of FPI investment concentration limits on g-secs, under the General Route
• Higher investment ceilings for NRIs and OCIs in listed equity investments without SEBI registration, with the same facility extended to all individual PROIs on par with NRIs and OCIs.
• A concessional swap facility to PSUs for availing ECBs, until 30^th Sept-26
• A similar facility for bearing the full hedging cost to AD banks for raising fresh 3–5-year FCNR (B) deposits, until 30^th Sept-26

Inferences and Outlook

The Jun-26 MPC convened against the backdrop of a protracted West Asian conflict marked by a tenuous ceasefire, as economic spillovers from the energy crisis continue to linger. Amidst a macro landscape that could potentially worsen owing to the uncertainty around the intensity and longevity of the conflict, the MPC has attached considerable risks to its baseline assessment of both growth and inflation.

• The expected drag on growth is projected to be slightly more pronounced in H1 FY27 (6.5% vs 6.7% in H2).
• However, inflationary pressures are likely to intensify in H2 FY27 (5.7% vs 4.7% in H1) - drifting closer towards the upper tolerance band of RBI’s inflation target. 

Upside in FY27 CPI inflation trajectory is likely to emanate from multiple channels:

• Reflecting sustained pressure from elevated global oil prices, retail diesel and petrol prices have been raised by 8.4% and 7.4%, respectively, since 15^th May-26, ending a four-year freeze. On a statistical basis, this is estimated to add ~35 bps directly to the headline CPI inflation over May-Jun-26.
• In addition, second-order inflationary effects stemming from increase in commercial LPG prices, ATF, and other industrial fuel costs are already beginning to show up in processed food and restaurant prices, passenger airfares, and packaging costs, likely to exert a drag on consumption.
• Food inflation trajectory could face upside pressures from a below-normal monsoon outlook, downgraded to 90% of LPA (from 92% earlier) by the IMD amid the expected onset of El-Nino in Jun-26. This could get accentuated by any potential fertilizer supply shortages against a backdrop of elevated global fertilizer prices (IMF fertilizer index +44% YoY during Mar-Apr-26), even as current stocks remain comfortable (~50% of kharif season’s requirement).
• Meanwhile, Core WPI inflation (excluding indices for food & beverages and fuel items), jumped to a 43-month high of 5.7% YoY in Apr-26. Our sensitivity analyses suggest that price pressures from Core WPI inflation could typically begin to pass through to Core CPI inflation with a lag of two quarters. 
• Additionally, risks from imported commodity driven inflation could exacerbate owing to a cumulative 12% depreciation in the INR over the last one year.

Growth outlook would be shaped by an interplay of the following factors:

• The extent of slowdown in global growth: The OECD in its Economic Outlook for Jun-26 projects global growth to moderate to 2.8% in CY26 from 3.4% in CY25, assuming an easing in energy prices from mid-2026 onward. However, under a prolonged energy disruption scenario, global growth could decelerate to 2.1% (worst case scenario). 
• Softening in urban demand, owing to pass-through of higher fuel prices to consumers and second-order effects, which may weigh on purchasing power.
• Below-normal monsoon could lead to a decline in agriculture incomes and in turn rural demand.
• On the fiscal front, while revenue shortfall from excise duty cuts and a larger subsidy outgo could increase the risk of fiscal slippage, record high RBI dividend of Rs 2.87 tn along with Rs 1 tn of ESF provide some headroom to push forward public capex.
• Having said, tailwinds from the anticipated India–US trade deal, together with the operationalisation of recent FTAs with EU, UK and New Zealand over the coming quarters, could significantly boost India’s export momentum and uplift its medium-term export trajectory. Additionally, government-backed income support measures and targeted rural cash transfers could cushion the downside in consumption demand. 

Looking ahead, the geopolitical climate remains fragile and volatile. As the energy crisis enters its fourth month and ensuing spillovers begin to permeate the domestic economy, all hopes remain pinned on a durable resolution of the conflict. Assuming that crude price will average at around USD 95 pb in FY27, we are less sanguine than RBI on both growth and inflation fronts. We expect FY27 GDP growth to decelerate to 6.2%, and CPI inflation to harden to 5.5%.

Against this, we now anticipate the MPC to commence its tightening cycle in Oct-26, with cumulative policy rate hikes of 50–75 bps likely by Mar-27. Such a path would be broadly in line with prevailing market expectations of 1-2 rate hikes by the US Federal Reserve over the next 12 months.