Interest rate cuts in near future unlikely: RBI Governor Malhotra

The Reserve Bank of India (RBI) Governor Sanjay Malhotra, after announcing a 25 basis points rate hike – its first such move since February 2023 – said that rate cuts in the near future are unlikely, given the current economic conditions. The bank has joined other central banks in raising rates, where higher crude oil prices have fuelled inflation and impacted the currency.

The central bank has shifted its stance to "calibrated tightening" from "neutral" earlier. "This is a milder form of tightening, where the decisions have to be more measured, to the evolving macro-economic conditions," Malhotra said.

Thus the central bank will be more data-dependent (which is what economists expected) and not pre-determined. "Price stability, keeping in view that growth is our primary mandate, we will continue to pursue this mandate."

The sharply evolving macro-economic conditions also mean that a further hike in December 2026 cannot be ruled out, with most economists pointing out to a further 50-75 basis points rate hike in fiscal 2027.

Sakshi Gupta, principal economist at HDFC Bank said, "The change in stance to calibrated tightening signals that today’s rate hike is the beginning of a rate hiking cycle and not a onetime move. The RBI’s tone and revised macro forecast tilted on the hawkish side with the growth forecast revised up by 40bps to 7.1% and inflation revised up to 5.2%. for FY27," she told Fortune India.

"We expect cumulative rate hikes by the central bank to the tune of another 50-75bps over the next few months. The risk of a more aggressive rate hike cycle hinges on whether the current West Asia conflict and rise in oil prices continue to linger on for longer. We expect inflation to average at 5.4% in FY27 with 6.3% expected in the current quarter," she said.  

Indranil Pan, chief economist at YES Bank said: "The Governor had to bite the bullet and he has done so. I do not find the policy hawkish; he is not bringing the hammer down," The RBI governor is also indicating that there is still limited evidence of demand side pressures.

Aditi Nayar, chief economist from ICRA said: "The inflation prints are expected to harden moving forward, on account of a combination of factors such as the poor monsoon, rising commodity prices and an unfavourable base effect, setting the stage for another rate hike in December 2026. as of now, we do not foresee the need for further rate tightening in 2027."

Malhotra has also urged banks to do their "due diligence" and take their time to use the FCNR(B) deposits.  

After the rate announcement, the rupee depreciated against the dollar to 96.81, even as capital outflows continued to be persistent. With the forex market not yet completely convinced that the depreciation is complete, Malhotra responded to a media query by saying: "The markets can be quite irrational in the short run, It is only in the long run that they are able to find the right value. The rupee is not overvalued, it may be undervalued."