RBI policy & market outlook: Calm is conditional, say analysts

For Indian markets, the bigger issue over the next few months, analysts said, isn't the repo rate, but how much more geopolitical pressure the rupee can take before the central bank has to step in.

The recent stability in Indian equities has been underpinned by easing geopolitical concerns and benign oil prices. However, analysts believe this calm is conditional, warning that any adverse developments in West Asia leading to a spike in crude oil prices could hurt market sentiment and cap further gains.  The Reserve Bank of India (RBI), too, has its eye on developments in West Asia that may put oil on the boil back again, even though the central bank cut its 2026-27 (FY27) consumer price index (CPI) inflation forecast to 5 per cent from the earlier projected 5.1 per cent, while raising real GDP growth projection to 6.7 per cent from 6.6 per cent.  If the conflict widens and crude climbs further, taking the dollar up with it, Sachin Sawrikar, managing partner, Artha Bharat Investment Managers suggests the RBI may have to respond even before its next scheduled meeting. 

 

   For Indian markets, the bigger issue over the next few months, he believes, isn't the repo rate, but how much more geopolitical pressure the rupee can take before the central bank has to step in harder.  “​The calm is conditional. The RBI will step in to protect the rupee first​, if required, using liquidity tools and direct market intervention, and only look at rates after that. This should be read as a pause, not a sign that the external risk is behind us. For Indian markets, the bigger issue over the next few months isn't the repo rate, it is how much more geopolitical pressure the rupee can take before the central bank has to step in further," Sawrikar said.  Inflation concerns  Going ahead, the RBI feels elevated energy prices, persistent supply chain pressures and uncertainty over global trade policies could weigh on economic activity. The central bank also flagged the risk of a deficient and uneven southwest monsoon (El Niño impact), could impact agriculture and rural demand.  The MPC statement, according to Madan Sabnavis, chief economist at Bank of Baroda, highlights the economic strength, evident from different macro indicators.  "Inflation is not a concern today, but will remain elevated in Q3 and Q4 of this year, as well as Q1 of FY28, though will be lower at 5.3 per cent. This suggests that there can be a rate hike probably towards the end of the CY26 in case these inflation numbers materialize," he said.  Given the early signs of inflation rising and potential for growth to surprise on the upside, analysts at BofA Global Research believe the RBI still may need to pivot to a more hawkish bias as growth visibility improves, and inflation risks start to manifest themselves. 

   “Given the dovish guidance, we believe a hike has been ruled out in October however, the incoming domestic data and the evolving narrative around Federal Reserve's outlook remains key to watch,” said Rahul Bajoria, Head of India and ASEAN Economic Research, BofA Global Research.  Stock markets, meanwhile, said G Chokkalingam, founder and head of research at Equinomics Research, are not too much worried about the possibility of a rate hike as things stand.  "RBI's stance on GDP growth and inflation lends confidence. The key monitorable, however, remains how things play out in West Asia and their impact on crude oil prices. With monsoon's improving and a lid on oil prices, the overall market sentiment should mostly remain buoyant in the months ahead. Oil above $100 a barrel (bbl) will dent sentiment," he warns.