'MPC signals strategic prudence, potential rate hikes likely from October'

The Reserve Bank of India (RBI) has held its benchmark repo rate steady at 5.25 per cent, maintaining a 'Neutral' policy stance as it balances inflation concerns with the need to support economic growth. The decision, announced by the Monetary Policy Committee (MPC), underscores a calibrated approach in an increasingly uncertain domestic and global environment. While retail inflation recent prints have remained under control, the broader inflation outlook presents mixed signals. 

  Consumer Price Index (CPI) inflation stood at 3.48 per cent in April 2026 comfortably within the RBI’s target band of 4 per cent ± 2 per cent. However, wholesale price inflation (WPI) surged to 8.3 per cent, driven largely by a sharp rise in fuel and power costs linked to geopolitical tensions in Middle East.  

Reflecting these risks, the RBI has revised its inflation forecast for FY27 upward by 50 basis points to 5.1 per cent with crude basket now priced in at USD 95 a barrel for the year.

  Global economic uncertainty continues to weigh on the policy outlook. Persisting inflation in advanced economies, volatile capital flows, and lingering supply chain disruptions have complicated the external environment. Despite domestic resilience, concerns around currency volatility and imported inflation remain. In response, the RBI has trimmed its FY27 GDP growth projection by 30 basis points to 6.6 per cent.  Alongside the policy decision, the central bank unveiled a series of measures aimed at improving capital inflows and stabilising the currency. These include higher investment limits for non-resident Indians (NRIs) and overseas citizens of India (OCIs) in equity markets, a similar facility for bearing the full hedging cost for FCNR(B) deposits till September 30, 2026, and concessional forex swap lines for public sector entities borrowing overseas.

  In a parallel development the government also announced amendments eliminating withholding tax and capital gains tax for Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) on government securities. The move is aimed at boosting foreign participation in India’s bond market and enhancing liquidity, particularly at the longer end of the yield curve.  Debt markets reacted positively, with yields at the shorter end of the curve declining by 10–20 basis points, reflecting reduced near-term rate hike expectations. However, we believe that liquidity measures and capital flow initiatives are unlikely to have an immediate impact on the broader economy. 

 

While immediate forex inflows are not anticipated from the above measures, they are likely to arrest the recent capital outflows and foster improved market sentiment, as they represent more investor-friendly initiatives rather than capital control policies. In the long term as global uncertainties subside, these actions should translate into increased forex flows. Markets will also await the announcement of the Bloomberg bond index inclusion due this month.

  Against this uncertain backdrop, the decision to hold rates should not be interpreted as inaction but rather as strategic prudence. The current stance in our opinion reflects a “wait-and-watch” approach as the MPC awaits more data especially on the inflation front and allows for further evaluation of the pivotal monsoon season. There would also be more clarity on the global policies as the new FED governor delivers his first policy. 

  Considering current inflation expectations, it is anticipated that the MPC will evaluate potential rate hikes beginning in October. However, due to ongoing global uncertainties and fluctuating developments in the Middle East, risks remain elevated.

We expect markets to remain nimble with major action in the shorter end of the curve. The current spreads may continue to remain attractive both in the money markets and the 2-3 year corporate bond segments. On the longer end we prefer the ultra-longer end of the curve given the absolute spreads. Overall we expect the 10 year to trade in the 6.85 per cent-7.25 per cent range in the medium term as the focus shifts on Fiscal front. (Source: RBI) SEBI Reg: LIC Mutual Fund | Reg No: MF/012/94/5   

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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.  ((Disclaimer: This article is by Pratik Shroff, Fund Manager - Fixed Income at LIC MF. Views expressed are his own.))