Reserve Bank of India Governor Sanjay Malhotra on Friday, through a series of measures aimed at boosting capital inflows into India, took steps to address one pressing concern: the rupee's depreciation against the US dollar. A second problem—inflation—however, persists. And the Governor appears to be signalling to the market ecosystem to prepare for the possibility of an interest rate hike, say experts.

Malhotra said the inflation target of 4% (with a tolerance band of +/- 2%) will not be in abeyance and was sacrosanct for the bank. "The target is to be met over a medium term; it is not advisable to take action for every small deviation from the target. This can have consequences which can be disproportionate for growth."

In the same breath, he also added that the RBI will continue to be watchful if inflation was getting generalised and building into expectations. On Friday, the RBI raised the retail inflation target for FY27 to 5.1% and core inflation at 4.7%.

“Prices of several inputs such as commercial LPG, industrial raw materials, chemicals, base metals, rubber, and plastic products, among others, have increased. These could exert upward pressure on the CPI inflation in the coming months as firms pass on higher input costs to the customers," he said in his policy statement.

Devang Shah, head (fixed income) at Axis Mutual Fund, said, "We are not out of the woods on inflation. What the Governor was working on today was to improve the BoP deficit situation and bring back positivity around the currency. Based on data, the RBI will hike rates. It is preparing the markets for a rate hike."

Even as crude oil prices (Indian Basket) have eased to $98.03 per barrel in June from $114.48 in April, the pressure on India’s import bill will continue if oil prices stay elevated above $90 per barrel.

Rumki Majumdar, director and economist at Deloitte India, said, "The RBI will remain watchful of the price movement in the coming months. By keeping the policy rates unchanged [5.25% as of now], it is preserving its monetary 'armour' to fight the inflation war as and when it happens." She added that the RBI probably will use a wider toolkit, such as liquidity operations, forex intervention, and policy communication to manage inflation and currency volatility.

Amar Ambani, executive director and head,iInstitutional equities, YES Securities, said, "Despite the current pause, the monetary policy cycle appears far from complete. With inflation projected to average 5.1% during FY27 and risks skewed to the upside, the RBI is likely to resume policy tightening in the coming months."

"We expect the rate-hiking cycle to begin as early as the August policy meeting, with cumulative rate increases of 75–100 basis points over the course of the current fiscal year. Such a move would take the repo rate to approximately 6.0–6.25%, enabling the RBI to maintain a positive real policy rate of at least 100 basis points. This would be consistent with the central bank's objective of ensuring that inflation expectations remain firmly anchored while preserving macroeconomic stability," he told Fortune India.

Sakshi Gupta, principal economist at HDFC Bank, sees a tightening cycle in October this year. “We expect inflation to average at 5.2% in FY27 accounting for recent petrol and diesel pump price increases, second order effects, and impact on food inflation due to El Niño. We expect H1 FY27 average CPI at 4.7% and H2FY27 average at 5.9% with core inflation now estimated at 4.8% for FY27," she said.

"Given this backdrop, we now estimate 50 bps rate increase by the RBI in FY27 with the possibility of the start of the tightening cycle in October policy," she said. The RBI could hold rates again in August, she told Fortune India.

Alongside, growth will continue to ease in FY27 and the central bank forecasts India’s GDP for FY27 at 6.6%, down by 30 bps from its earlier 6.9% forecast.

Economists and bankers have welcomed the measures to boost capital inflows, which will include steps for designated banks to raise capital through ECBs and FCNR(B) offerings.

Axis Mutual Fund’s Shah estimates that India could raise $50-60 billion through these offerings. Gupta from HDFC Bank said while an exact quantum of capital inflows is difficult to quantify at this stage, "The combined impact could certainly help bridge the $40-50 billion gap on the balance of payments that we had estimated for FY27."