The Reserve Bank of India (RBI) is expected to gradually increase interest rates in the fiscal year 2027-2026, according to a new report from HSBC Global Investment Research. India's GDP growth in the second quarter of the fiscal year 2027-2026 has been recorded at 7.8%, significantly above RBI's forecast of 7%.
Analysis of Economic Factors
The report predicts that the RBI will increase the repo rate by 50 basis points in the fiscal year 2027-2026 to combat inflationary pressures and sustain economic growth. Specifically, it is expected that the interest rate will be raised in two phases by 25 basis points each, reaching 5.75%. Strong economic growth and inflationary pressures are among the factors justifying this decision.
HSBC also noted that inflation in India is expected to remain above 5% on average in the coming quarter. This situation allows the central bank to gradually increase interest rates. According to forecasts, inflation in the first half of the fiscal year 2027-2026 will be close to RBI's target of 4%, but it will rise in the second half of the year.
Economic Implications
The HSBC report also reminds that Brent oil prices have rebounded to higher levels after a temporary decline in June. El Niño conditions, which will strengthen in December, may exert additional pressure on food inflation. These factors could lead to increased production costs and ultimately higher prices for consumers.
Moreover, rising consumer demand and advancements in manufacturing activities are key factors in sustaining this economic growth. The Indian government has also contributed to this trend by reducing the Goods and Services Tax (GST) and increasing public capital expenditure.
However, economic growth is expected to decline in the future due to a high base from the past, reduced public spending, and adverse weather conditions. It is also anticipated that India's current account deficit will rise to 1.3% of GDP in the fiscal year 2027-2026, driven by rising oil prices and imports of electronic goods and other essential items.
Finally, it is estimated that the central government's budget deficit may be 0.5% of GDP higher than the initial estimate, as expenses will increase due to necessary measures to address energy price shocks.
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