RBI may begin rate hike cycle in Oct; 50 bps increase in FY27: Elara

Elara Capital said that it is building in the first-rate hike in October 2026 and see a total of 50 bps hike this financial year.

The RBI has delivered a well-calibrated policy response that addresses immediate external vulnerabilities while acknowledging medium-term inflation and growth challenges. The combination of regulatory easing on debt flows and fiscal measures on taxation significantly improves India’s external resilience. While inflation risks remain real, the enhanced capital flow pipeline should provide the necessary buffer for a gradual and orderly adjustment in the Rupee.

 

We estimate that the measures could bring in USD 40-55 bn in capital flows, which amid other sources like FDI, remittances, help to limit the fallout on the Balance of Payment. FY27E BOP deficit may limit to 0.6-0.7 per cent of GDP from 1.8-2 per cent of GDP before the announcement of the measures today. We see the direction of Rupee reversing from here and see it gradually moving towards 93.5-94 over next 3-5 months.

 

Inflation risks are real

 

CPI inflation for FY27E is projected to average 5.1 per cent Y-o-Y vs 4.6 per cent previously with risks on the downside. The revision is driven by energy shock with RBI sounding alarm over second order impacts and generalised pass through of the elevated energy prices across every component of the CPI basket.

 

Uncertainty about the spatial and temporal distribution of the south-west monsoon and El Nino conditions add to the upside risks. Real GDP growth projection for FY27 is revised lower to 6.6 per cent Y-o-Y vs 6.9 per cent in Apr-26, with risks on the downside. The complete resolution of energy situation would take atleast 3-4 quarters even if the West Asian crisis were to resolve by end of this month. As such the risks to growth could be more amplified than currently felt. Rise in prices of energy and other inputs, coupled with supply disruptions, inclement weather conditions, are likely to weigh on economic activity mainly in H2FY27 as the higher inflation seeps into consumer balance sheets and corporate P&Ls.   

 

See first rate hike in October 2026  Today’s policy status quo on rates sends two signals- rate hike is not being used as tool to defend the currency, and two the risks to inflation start becoming more material from Q2FY27. The global conditions are evolving with many moving parts- conclusion of West Asian crisis, onset and impact of El Nino- which suggest a rate hike today may not have been warranted.  The RBI is likely waiting for the concessional hedging window (till September 30, 2026) to end before considering a rate hike because the subsidy on FCNR(B) deposits and related forex measures is a targeted, temporary tool to attract dollar inflows without the broader economic costs of monetary tightening. We are building in the first-rate hike in October 2026 and see a total of 50 bps hike this financial year. 

 

Debt flow measures to keep a check on yields

 

The RBI announced that Fully Accessible Route (FAR) now includes all new issuances of 15y, 30y, and 40y government securities. The simultaneous removal of short-term investment limits, concentration limits, and individual security caps under the General Route eliminates the residual operational friction that deterred active fund managers from building positions although the direction of yields and outlook for inflation and rates would also matter. In Jan-May CY26TD, FAR route has seen capital inflow of USD 1.6bn while the general route has seen outflow of USD -0.38bn, lower than same period last year flows of USD 4.2bn (FAR) and USD 0.8bn.  Incrementally, the reversal in the direction of the Rupee could also have a comforting impact on yields. 

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(Disclaimer: This article is by Garima Kapoor, deputy head of research & economist, Elara Capital. Views expressed are her own.)