The monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Friday (June 5) will review macro-economic conditions and announce an interest rate decision. This meeting could be one of the most interesting in recent years, as the macro-economic conditions have become challenging. Governor Sanjay Malhotra will need to walk the tightrope of balancing inflation and growth. 

The commentaries from economists to their clients have centred on rising inflationary pressures, a depreciating rupee, and whether the central bank will begin hiking rates sooner than expected, possibly with the first hike coming as early as Friday itself.

A section of economists forecast depreciating rupee, down 6.4% against the dollar in 2026 and one of the worst performing Asian currencies in the year, and rising inflationary pressures due to recent fuel price hikes might push the RBI to hike rates. But there is the theory that it is not prudent for a central bank to use interest rate hikes primarily to defend the currency or support the foreign exchange market.

There is a broader view the RBI should not hike rates immediately. There is still no clarity on whether the West Asia war will de-escalate. Also inflation has not breached the critical mandated RBI levels, so there is time for the bank to assess the current trend, the progress of the monsoon and the El Nino impact. 

Already the latest May 2026 monthly economic review from the Department of Economic Affairs has warned about moderation in consumption, going ahead. “With forecasts pointing to a below-normal monsoon and a likely moderation in economic activity, overall consumption demand may face headwinds in the coming months. Looking ahead, agricultural prospects for the upcoming kharif season are a source of both near-term comfort and medium-term caution,” the report said. 

India attracts growth capital, Nomura’s economists say. “If large rate hikes are used to defend foreign exchange, then weaker growth prospects will trigger more capital outflows,” Nomura’s economists Sonal Verma and Aurodeep Nandi said in a note. 

“An interest rate defence of currency could lead to expectations of policy tightening whenever the rupee weakens – which we believe would be a dangerous policy precedent for the MPC to set and will undo the hard-earned gains over the last decade,” the Nomura team said. 

Is growth being ignored? 

According to Dipti Deshpande, senior director and principal economist at ratings agency, two macros – the rupee and the 10-year G-Sec bond yields – are more vulnerable to the West Asia crisis, than all the other macros. 

“These two macros had weaker starting points last year. The rupee saw weakness in FY26 due to tariff imports. The concerns surrounding the AI supply chain in India has also increased risk of sentiment, resulting in higher FII outflows,” Deshpande told Fortune India. 

The 10-year G-Sec bond yields – which set the floor for interest rates and prices of loans – are trading at around 6.99%, up from 6.24% a year earlier. “These levels are forcing policy makers to look at these two macros first, compared to others. This does not mean that a central bank is de-prioritising the other parameters; it means others are in a relatively safer space,” Deshpande said. 

Two institutions, Crisil and YES Bank have pegged economic growth to slow down by 100 bps to 6.6% in FY27, from 7.6% in FY26. 

Usually in a scenario of an increase in prices of goods which are imported, monetary policy tries to bridge the gap between demand and supply, in a bid to slow down demand. In the current scenario, the supply issue is leading to forced demand destruction. 

Anubhuti Sahay, head of India economics research at Standard Chartered Bank said: “Supply challenges and increased retail fuel/ cooking gas prices has impacted demand in select sectors (ceramics, glass, restaurants etc) directly. The indirect impact on demand from other sectors due to higher prices on increased raw material prices is likely to show up as we progress further into FY27,” she told Fortune India. 

“It could get more pronounced in the second half due to the deepening impact of the El Nino effect,” she added. 

Inflation under check 

Being an inflation-focussed central bank, it is quite likely that the RBI will watch the second-round inflation. 

Nomura’s economists said inflation is still under check and not out of control. Sakshi Gupta, principal economist, HDFC Bank says she expects the RBI to stay on hold in the June and August policy as the extent and durability of the impact of the West Asia conflict remains unclear. “If the inflationary pressure turns out to be more durable in nature — clarity on which will emerge only by October, then there could be a case for the RBI to start looking at interest rate increases,” she said. 

“However, the decision is also partly likely to be influenced by the extent of drag on growth. A sharper than expected slowdown in growth — which in turn could also demand side inflationary pressures at bay — could delay tightening. For now we expect growth at 6.7% for FY27 with downside risks, inflation at 5.1% with upside risks and the possibility of 25bps increase in rates in Dec or Feb policy,” Gupta added. 

Standard Chartered Bank’s Sahay says that while downside risks to growth has increases, MPC’s policy decision will be guided by inflation outlook as inflation is its core mandate. 

The bank forecasts average CPI Inflation at 4.9% for FY27 and there is a risk of it to go towards 5.5% given it’s an El Nino year. “We expect the RBI to hike interest rates sooner than later. There could be a 25 bps hike in the repo rate in June, but it could be a close call considering the fall in crude oil prices, rupee volatility weakening and possibility of the US Iran deal being finalised in the last 10 days. In total we expect 50 bps hike,” Sahay said. 

Crisil’s Deshpande said cost-push inflation is being driven by supply side constraints. If the RBI hikes rates, it will impact demand, but supply side issues will not improve. 

One of the key data points the RBI will watch out for will be the inflation expectation survey of households (IESH), expected to be out on June 5. “If the RBI sees signs that the households’ inflation expectation data is high and rising, then they will be concerned,” she said. 

The current median inflation perception of households has inched up by 30 bps to 7.2%. Their inflation expectations for the three months and one year ahead rose by 60 bps and 20 bps to 8.5% and 8.8%, respectively.