Daijiworld Media Network - Mumbai
Mumbai, Oct 27: The Reserve Bank of India (RBI) is likely to raise the repo rate to 6.25% by the first half of 2027, implying cumulative monetary tightening of 100 basis points in the current cycle, as persistent inflationary pressures and resilient economic growth warrant a tighter monetary policy, according to a report by Deutsche Bank.
The report expects a 25-basis-point rate hike in December 2026, followed by another 50 basis points of tightening in the first half of 2027. The forecast is more hawkish than market consensus, reflecting expectations that economic growth will remain above 7% while inflation stays elevated.
Deutsche Bank projects consumer price index (CPI) inflation to average 6% in October-December 2026, 5% in FY27 and 4.7% in FY28. It flagged upside risks if domestic fuel prices are increased after Diwali. Wholesale price inflation exceeding 11% could also result in further cost increases being passed on to consumers.
Household inflation expectations have risen to 10% from 8% before the West Asia conflict, increasing the risk of second-round price pressures, the report said.
Despite these challenges, Deutsche Bank expects India's real GDP growth to remain above 7% in both FY27 and FY28. However, growth momentum could moderate in the second half of FY27 due to higher oil prices, a below-normal monsoon and an unfavourable base effect from the previous year's GST rate cuts.
The report also highlighted risks to the rupee despite recent RBI measures that temporarily reduced dollar demand and helped the currency recover to around Rs 94.50 against the US dollar. India's foreign exchange reserves have declined by around USD 60 billion from their peak of USD 786 billion in early September.
Deutsche Bank expects the rupee to weaken beyond Rs 97 per dollar during 2027 if there is no meaningful improvement in the global macroeconomic environment.
On the fiscal front, the bank expects the Centre to meet its FY27 fiscal deficit target of 4.3% of GDP, supported by the RBI's dividend and possible expenditure adjustments. However, it cautioned that fiscal consolidation could become more challenging in FY28 due to elevated oil prices, higher subsidy requirements and the expenditure implications of the 8th Pay Commission.
The bank said maintaining price stability alongside financial stability would remain critical as India navigates external economic uncertainty.