Inflation seen rising again; RBI may turn to rate hikes: UBS Securities

India’s inflation trajectory is set to reverse in FY27, prompting expectations that the Reserve Bank of India (RBI) may shift back to monetary tightening after a prolonged pause, according to a report by UBS Securities. 

The report released on Monday projects headline consumer price inflation to average 5.2% in FY27, up from an earlier estimate of 4.6%, driven largely by rising energy prices and broader spillover effects from ongoing geopolitical tensions. 

“We expect headline CPI inflation to average 5.2% YoY in FY27 (revised up from 4.6% earlier),” the report said, attributing the increase to “higher energy prices and broader spillovers from the Middle East conflict.” 

Inflationary pressures are spreading across sectors 

The report also highlighted that inflationary pressures are not limited to fuel alone but are spreading across sectors. “This reflects higher energy prices… including higher airfares (driven by elevated ATF prices), increased restaurant prices (owing to higher commercial LPG costs), supply-chain disruptions that raise input costs… the impact of a weaker INR, and rising risks to food inflation,” UBS noted. 

Importantly, the report flagged that inflation risks may persist even if global tensions ease. “Even if the conflict is resolved, inflation risks are likely to persist for longer than growth risks,” it said. 

Will there be a shift in the RBI’s policy? 

Against this backdrop, UBS expects a clear shift in the RBI’s policy stance. “We now expect the MPC to gradually pivot toward rate hike(s) in 2HFY27 in contrast to our prior expectation of a prolonged pause,” the report stated. 

The report also pointed out that markets have already started pricing in tighter monetary conditions. It added that the central bank is likely to respond by adjusting liquidity and short-term rates. “Amid rising inflation risks, we would expect RBI to nudge overnight rates higher and normalise system liquidity toward a more neutral zone,” it said. 

While inflation remained relatively benign at 3.2% in March 2026, UBS cautioned that the current environment marks a turning point, with energy shocks and weather-related risks likely to push prices higher in the coming fiscal year. 

The shift signals a potential end to the RBI’s accommodative stance, with implications for borrowing costs, financial markets, and overall economic growth.