Standard Chartered has revised its FY27 projection for the repo rate to 5.75%, up 50 basis points from its earlier estimate of 5.25% for the fiscal year, citing rising inflationary pressures in the economy amid the West Asia crisis.

“We expect 50 bps of rate hikes to 5.75% (previously 5.25%) in FY27, beginning in June, on a higher CPI view. We expect FY27 CPI at 4.9% (previously 4.7%) on spillover from revised WPI forecasts of 8.1% (previously 4.7%),” Standard Chartered said in a note on Thursday.

“Our FY27 rate hike forecasts face an upside risk of 25-50 bps if pressures on commodity prices and the INR sustain. A June pause without measures to support the external sector can raise the risk of second-order effects on CPI. The June MPC is likely to emphasise upside risks to inflation more than downside risks to growth,” it added.

“While the MPC has reiterated that its repo rate decisions are driven more by domestic growth and inflation dynamics than by the need to defend the currency, the sharper-than-expected pace of INR depreciation (the INR is trading at 96.80 versus our June-end forecast of 93) raises the risk of second-order effects on CPI and, in our view, strengthens the case for a hike. We have flagged the risk of a 25-50 bps repo rate hike since the start of the Middle East war,” the note said.

“We now think the Monetary Policy Committee (MPC) is likely to begin hiking from the June meeting, as domestic inflation risks are rising alongside higher global yields; a few Asian central banks have already delivered surprise hikes. Our revised four-quarters-ahead CPI inflation forecast is now at 5.1%, versus our prior forecast of 4.7% and last year’s CPI of 2.1%. While inflation would likely remain within the MPC’s mandated 2-6% target range, with 4% as the medium-term target, the risk of persistent inflation is, in our view, likely to trigger a policy response. We expect 50 bps of hikes, split equally between June and August,” it said.

“However, if there is no hike in June, the repo rate could be raised by 50 bps in August. We also see a risk of an additional 25-50 bps of hikes in FY27 if inflation turns out to be higher than we expect due to continued pressure from commodity prices and INR weakness,” it added.

The bank said it expects average crude oil prices at $95 per barrel in FY27, compared with its earlier estimate of $90 per barrel.

It also pointed to a greater spillover from imported WPI to CPI. “April WPI surprised significantly on the upside, printing at 8.3% versus consensus expectations of 5.5%. The upside surprise has prompted us to revise our FY27 WPI forecast to 8.1% from 4.7%. About 20% of India’s CPI basket is exposed to imported inflation risks,” the report said.