Rate hike not preferred course of action right now: Ambit's Nitin Bhasin

A rate hike does not appear to be the RBI's preferred course of action at this stage, said Nitin Bhasin, head, institutional equities, Ambit

In the latest June meeting, the Monetary Policy Committee (MPC) kept its key policy rates unchanged and maintained its  neutral stance, in line with market expectations. The Governor noted that while the Indian  economy entered this turbulent period with better fundamentals than in previous crises,  the global environment has deteriorated significantly, increasing headwinds for India.  

Concerns over inflation have intensified. In what can be interpreted as a cautious tone,  the MPC revised its inflation forecasts higher while flagging persistent upside risks from  global supply-chain disruptions. The Committee remains highly vigilant to inflationary  pressures, particularly the risk of second-round effects on wages and inflation  expectations. At present, underlying demand pressures remain benign, with core inflation  excluding precious metals at just 2.1 per cent as per latest data (April 2026). However, core  inflation is projected to rise to 4.7 per cent in FY27. Headline inflation is also expected to increase  from 4.6 per cent YoY to 5.1 per cent, peaking at 5.9 per cent in Q3FY26 before moderating thereafter. 

 

The outlook is largely driven by external shocks, including ongoing geopolitical tensions in  West Asia that are driving a sharp rise in energy prices. The RBI has also flagged risks to food inflation from a sub-normal southwest monsoon and potential El Niño conditions. In  addition, crude oil prices averaging around $110 per barrel—well above the earlier assumption  of $87 per barrel—are likely to intensify cost pressures and accelerate pass-through to  consumers as firms adjust to higher input costs.  

Growth prospects have moderated. The MPC has cut its FY27 GDP growth forecast to  6.6 per cent YoY from 6.9 per cent in its latest projections. This downgrade reflects persistent global  supply-chain disruptions, volatile financial markets, and elevated energy prices. These  factors are expected to weigh on activity by raising input costs and exacerbating supply bottlenecks. The resulting pass-through to retail inflation could further erode household  purchasing power and dampen domestic demand. Risks are also tilting to the downside  from weather conditions, with the India Meteorological Department (IMD) flagging a higher likelihood of monsoon deficits, which could impact the agricultural outlook and rural demand.  

Measures to incentivise capital flows and support the rupee. Amid heightened global  uncertainty driving volatility in forex markets and pressure on emerging market currencies, the RBI announced a five-point package aimed at supporting the rupee through enhanced  capital inflows and improved FX liquidity. 

G-sec FAR expansion and tax rationalisation: The inclusion of 15-, 30- and 40-year  government securities under the Fully Accessible Route, alongside the removal of  general route limits and capital gains tax, is expected to deepen foreign 

participation. This could potentially attract $35–40 billion of inflows over the  next year.  

NRI/OCI equity investment limits: Higher investment caps in listed equities have  been extended to all individual Persons Resident Outside India (PROIs), broadening  the investor base.  

Concessional forex swap facility (ECBs): Public sector undertakings will be  offered a concessional forex swap facility on external commercial borrowings until September 30, 2026.   

FCNR(B) hedging support: Full hedging-cost support for banks raising 3–5 year  FCNR(B) deposits, reviving a mechanism that helped mobilise around USD 34 billion  during the FY14 taper tantrum episode. 

Export proceeds realisation: The timeline for repatriation of export earnings has  been reduced from 15 months to nine months, aimed at accelerating forex inflows.  

Looking ahead. Policymakers appear to be increasingly relying on debt flows as the  primary channel for attracting foreign capital amid a sharply falling currency. With the yield differential between India and the US narrowing and the RBI revising its FY27 inflation outlook higher, market attention is beginning to shift from whether rates will rise to when the RBI might be forced to tighten policy.  

That said, a rate hike does not appear to be the RBI's preferred course of action at this  stage. First, the experience of 2013 showed that raising the MSF and repo rates had limited  success in stabilizing the rupee. Second, the Governor highlighted significant uncertainties  surrounding the duration of geopolitical conflicts and the restoration of global supply  chains, both of which could weigh materially on growth. Finally, with inflation still projected  to remain within the MPC's 2–6 per cent target band, the MPC could use the room to adopt a data dependent approach while prioritising growth. Instead of relying on monetary tightening in  the immediate near-term, the RBI appears more inclined to deploy targeted regulatory and  liquidity measures to support the currency. The RBI Governor also indicated that the RBI  may use policy and regulatory tools to curb excessive rupee volatility, particularly when  driven by speculative market positions. 

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Disclaimer: Nitin Bhasin, head, institutional equities, Ambit. Views expressed are his own.