RBI’s MPC unanimously raised the repo rate by 25 bps to 5.50% – its first hike since Feb-23, while shifting its policy stance from ‘neutral’ to ‘calibrated tightening’
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In line with market consensus and our expectations, the RBI’s MPC unanimously raised the repo rate by 25 bps to 5.50% – its first hike since Feb-23. Contrary to our expectations, however, the MPC also shifted its policy stance from ‘neutral’ to ‘calibrated tightening’ by a 4-2 vote. Encouraged by a strong Q1 FY27 GDP print and resilient high-frequency indicators, the central bank raised its FY27 GDP growth forecast to 7.1% (from 6.7%). At the same time, persistently elevated commodity prices and a disappointing monsoon led it to raise its FY27 CPI inflation projection to 5.2% (from 5.0%). In our view, inflation risks remain tilted to the upside, given the renewed spike in crude oil prices, multi-year-high shipping costs, festive-season pass-through of higher input costs and the lagged impact of one of the weakest monsoons in over a decade. We expect CPI inflation to average 5.3% in FY27. Externally, a still vulnerable BoP and near-coordinated monetary tightening across DM and EM economies support further policy action. We maintain our call for 25 bps hikes in Dec-26 and Feb-27, taking the repo rate to 6.00% by end-FY27, even as we see growth moderating to ~6.5% in H2 FY27. A final hike in Apr-27 cannot be ruled out, although our conviction on it is low. On fixed income, we expect the 10-year g-sec yield to touch 7.50% before end-FY27, driven by further rate hikes, rising global yields and a challenging FY28 fiscal arithmetic.