Economists see a rate hike coming in early 2027 as RBI focus firmly on inflation

India could see the Reserve Bank of India (RBI) starting to hike interest rates from early 2027, economists say, with the objective of ensure that inflation does not go out of hand.

The MPC noted that headline CPI inflation edged up above the target, at 4.38% in June 2026. This is above the RBI's medium-term headline inflation rate of 4% (with a tolerance band of +/- 2%).

"The realised inflation for Q1, however, remained marginally lower than projections reflecting limited pass-through of cost pressures. The higher inflation is mostly on account of fuel and food with little signs of generalisation of price pressures so far," the RBI Governor Sanjay Malhotra told media, after keeping interest rates on hold at 5.25%.

"Core inflation excluding precious metals continues to be benign. As projected earlier, headline inflation is expected to rise further in the near term and peak in Q3:2026-27, primarily due to food and fuel, before moderating thereafter," Malhotra said.

Dipti Deshpande, senior director and principal economist at ratings agency Crisil, said: "My biggest concerns are on inflation side, we are not sure how the West Asia tensions are going to pan out. If oil prices do not go much higher, but stay elevated as they are now, given that demand in the economy is strong, the manufacturing sector will keep passing it on."

Sakshi Gupta, principal economist at HDFC Bank says she also expects the RBI to start hiking rates in early 2027. “We continue to expect the central bank to start its rate hike cycle in FY27, likely from early 2027. For now, improving liquidity conditions over the coming weeks – with strong dollar flows on account of RBI measures, is likely to push down domestic yields especially at the short-end,” Gupta said.

Gupta said the RBI’s commentary suggests that the bar for tightening is high in the near-term and any rate action needs to be preceded by broad-based, second round inflationary pressures rather than temporary spikes in oil or food prices. Today’s policy also reaffirms that the RBI remains primarily guided by domestic inflation and growth dynamics, despite the prospect of higher rates by global central bank rising.”

Even while the monsoon activity across India remains a bit erratic, the MPC is happy that due to various government measures. Poonam Gupta, deputy governor of the RBI, said "The agriculture sector has been resilient and irrigation has improved. Rainfall deficiency vagaries matter less and mechanisation has improved.

This will augur well for the incomes and consumption demand for India’s rural economy, which is expected to be resilient even in the second half of FY27.

Deshpande says that the monsoon in July is already at 1% surplus, while the IMD feared that would be a 6% deficit in levels.’

Crisil's Deshpande also pointed out to a Crisil study on Deficient Rainfall Impact Parameter (DRIP), an indicator which they have tracked for nearly 25 years, measuring the vulnerability of crops and states to rainfall deficiency while accounting for irrigation availability.

The latest update is that improvement in kharif sowing is being seen across crops such as cotton, pulses, bajra, maize and toor but some stress is being witnessed in jawar, oilseed (soyabean and oilseed).

But the key highlight which the regulator and economists have pointed out is that the pressure of a failing monsoon on food inflation is reducing. "The relationship between deficient monsoon and kharif (monsoon crop) output is fairly direct and linear, but the relationship between traditional monsoon and higher food inflation has weakened in recent years, due to various government measures," Deshpande said.