No interest rate hikes needed in 2026 as India’s inflation expectations remain well anchored: JM Financial

No interest rate hikes are needed in 2026 as India’s inflation expectations remain well anchored, with consumer price inflation unlikely to breach 6% on a sustained basis, according to JM Financial Research on Wednesday. 

The brokerage expects CPI inflation to average around 5% in FY27, 10 basis points below the Reserve Bank of India’s forecast. It said the current inflation outlook does not warrant monetary tightening, and does not factor in any rate hikes in 2026.

“Accordingly, we do not factor in any rate hikes in 2026,” JM Financial said in its latest macroeconomic report.

However, the brokerage flagged crude oil prices and deficient rainfall as key risks to India’s inflation outlook. It said the global inflation outlook would remain closely tied to the trajectory of crude oil prices, while India could face second-round effects from higher energy costs.

Recent PMI surveys have pointed to a rise in output prices, particularly in services, even as input costs have moderated, indicating early signs of businesses passing higher costs on to customers.

Deficient rainfall, low reservoir levels pose risks

JM Financial said around 40% of the country has received deficient rainfall so far, while weather agency Skymet has reiterated its below-normal monsoon outlook.

With around three-fourths of the monsoon season completed, reservoir levels stood at only 64% of capacity, compared with 77% a year ago.

The brokerage said depleted reservoir levels could add to inflationary pressures during the rabi season, particularly across rainfed states such as Maharashtra, Rajasthan, Karnataka, Kerala and Madhya Pradesh, as well as the Northeast.

Elevated crude prices keep rupee under pressure

The rupee has remained under pressure despite strong capital flows and an improvement in foreign exchange reserves, with crude oil prices emerging as the key overhang.

Crude prices rose 19% in August before easing to $88.6 a barrel. JM Financial noted that the rupee weakened even during periods of weakness in the US Dollar Index.

Meanwhile, the FCNR(B) scheme attracted $65.4 billion till August 21, prompting the Reserve Bank of India to discontinue the scheme a month ahead of schedule. Forex reserves also improved significantly to $717 billion, providing around 11 months of import cover.

Foreign institutional investor flows remained positive for the third consecutive month, with inflows of $2.5 billion recorded till August 25.

Despite these positive flows, JM Financial expects the rupee to retain a depreciating bias in the near term, albeit at a gradual pace.

Weak dollar boosts gold appeal

The brokerage also highlighted rising global yields and concerns over the US government's fiscal position, with US government debt having crossed $40 trillion.

The US dollar has weakened despite higher Treasury yields, which JM Financial said was particularly noteworthy and could signal a loss of appeal for US assets.

Such an environment could hamper safe-haven flows into US assets while encouraging global central banks to diversify their reserves towards gold.

Gold has gained 37.7% over the past year and 12.7% over the past month, according to data cited by JM Financial.