Heightened geopolitical tensions and uncertainty have complicated the task for global central banks. With mounting concerns around energy prices and inflation, we have seen major central banks like the European Central Bank (ECB) and Bank of Japan (BOJ) go for rate hikes, even while the US Federal Reserve has remained on hold. The central banks of Australia, South Korea, South Africa, Indonesia and the Philippines have also raised rates in the past few months.
With looming uncertainties, the US Fed has removed forward guidance from its official statement, opting for flexibility to react to incoming data. The Reserve Bank of India (RBI) has also been signalling that its future action would be data-dependent.
Given the fluid macro backdrop, we feel that the RBI will maintain status quo in the upcoming monetary policy committee (MPC) meeting and wait to see how inflation and growth dynamics play out in the coming months. The tone of the central bank is likely to be cautious to keep the markets prepared for higher rates if inflationary concerns aggravate.
The RBI governor has reiterated that the central bank’s primary mandate is inflation control. India’s consumer price index (CPI)-based inflation has increased steadily to 4.4% in June from 2.7% at the beginning of the year. There are concerns around volatile crude oil prices and their impact on India’s fuel and overall inflation.
Deficient monsoon so far has also raised concerns about food inflation. Food inflation rose to 5.1% in June and is likely to increase further in the coming months. Given the concerns around deficient monsoon, we expect food inflation to average a high of 7.5% in Q3 FY27 before moderating in the fourth quarter. For the full year, we expect CPI inflation to average 5%. So far, the concern is mainly across food and energy prices that is influenced by supply-side factors.
Core inflation, excluding food and fuel, remains lower. In fact, core inflation is at a low of 2.9%, if we strip off precious metal prices from the index. While monetary policy cannot control supply-side inflation, the central bank would be wary of higher food, fuel and input prices getting entrenched in the system, resulting in higher household inflationary expectations and broad-based inflationary environment.
Wholesale price index (WPI)-based inflation surged 9.9% in June 2026, underscoring emerging inflationary risks. However, we still expect consumer inflation to remain within the RBI’s upper tolerance limit of 6%.
Now, let’s look at the growth story. The uncertain macro-environment marked by the West Asia crisis, US tariff threats and likelihood of deficit monsoon has led to concerns around growth. However, so far, the Indian economy has been showing resilience as reflected by healthy momentum in high-frequency indicators like IIP, ISP (index of services production), core sector, bank credit demand and exports growth.
However, there is no denying that there are concerns around higher input costs for the manufacturing sector. Moreover, investment and consumption in the economy could feel the adverse impact of uncertain macro-environment and rising inflation. With the impending domestic and external macro threats, we expect the GDP growth to moderate. However, we still expect it to remain healthy at around 6.7% in FY27.
India’s external sector is also showing resilience as it adapts to the fluid environment. After a weak FY26, India’s goods exports have picked up, rising a robust 16% in Q1 FY27. And the improvement is not jusy a reflection of higher crude oil prices, as exports excluding petroleum products also grew a strong 12% during the period. Services exports and remittances have also remained healthy. While current account deficit is expected to widen in FY27, we expect it to remain comfortable at around 1% of GDP.
A sharp rupee depreciation is a concern for the central bank. The Indian rupee has fallen by 5.5% since the beginning of the West Asia crisis. To be sure, weakness in other oil import-dependent Asian currencies like the Thai Baht, Philippine Peso and Indonesian Rupiah has been sharper in this period. Rising US bond yields and further dollar strength could exert additional pressure on the the domestic currency.
However, with the recently announced RBI measures, we are already seeing strong inflows coming in through FCNR deposits. foreign investments into debt and equity have also improved, as per recent data. Overall, the balance of payments (BoP) is likely to turn to a large surplus in FY27, from deficits recorded in the previous two years.
In this uncertain environment, we expect the RBI MPC to maintain status quo in the August meeting as it closely assesses the incoming data. With the growth indicators still showing resilience, the RBI would be particularly watchful of inflation. The central bank would keep the option open for a rate hike later during the year, if there are signs of inflation getting broad-based.
Rajani Sinha is chief economist at CareEdge Ratings.