Reserve Bank of India expected to hold rates as inflation stays in comfort zone, Reuters poll shows
A hold from the RBI, in line with 68 of 72 economists surveyed by Reuters, would keep India as a notable outlier among emerging and developed market peers that have already hiked in response to the oil-price shock from the Iran war. The divergence keeps the rupee vulnerable, since the currency’s recent pressure has been explicitly linked to a lack of widening rate differentials with major economies, an appeal factor for foreign capital that measures like the capital-gains tax scrap and dollar deposit sweeteners haven’t fully offset despite drawing nearly $40 billion in inflows. Swap markets already pricing roughly 75 basis points of tightening over the next 12 months suggest traders expect the RBI’s flexibility to narrow over time, with wholesale inflation at 9.87% flagged as a leading indicator for CPI pressure three to four months out. The central risk for rupee and rate-sensitive assets is that a delayed hike leaves India more exposed to renewed oil-driven currency pressure in the interim, even as core inflation remains contained for now.
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India is betting on inflows rather than rate hikes to defend the rupee, but economists say that flexibility won’t last forever.
Summary:
- 68 of 72 economists polled by Reuters expect the RBI to hold rates steady on Wednesday, diverging from central banks in Europe, Australia, Indonesia, the Philippines, Singapore, South Korea and South Africa, all of which have hiked since the Iran war began five months ago
- Retail inflation rose to 4.38% in June, above the RBI’s 4% target for the first time in 17 months but still within its 2%-6% tolerance band, while core inflation remains near 4%
- Citi’s Samiran Chakraborty said a rate hike is unlikely in 2026 unless core inflation sustains above 4.5%
- Wholesale inflation climbed to 9.87% in June, which Axis Bank’s Tanay Dalal expects to pass through to CPI over three to four months
- Interest-rate swap markets are pricing roughly 75 basis points of tightening over the next 12 months
- The RBI has instead used measures such as scrapping capital-gains tax for foreign holders of Indian government bonds and sweetening dollar deposit schemes, attracting nearly $40 billion in inflows, though the rupee remains under renewed pressure from higher oil prices
India’s central bank is expected to keep interest rates unchanged this week, according to a Reuters poll of economists, diverging from many global peers as inflation remains within its comfort zone despite higher oil prices tied to the ongoing war in the Middle East.
Sixty-eight of 72 economists surveyed by Reuters predicted the Reserve Bank of India’s Monetary Policy Committee would hold rates steady on Wednesday, even as it may adopt a more hawkish tone. The decision would keep India apart from central banks in Europe, Australia, Indonesia, the Philippines, Singapore, South Korea and South Africa, all of which have raised benchmark borrowing costs since the US-Israeli war on Iran began five months ago. The Federal Reserve and Bank of Japan have similarly kept rates on hold.
Retail inflation accelerated to 4.38% in June, above the RBI’s 4% target for the first time in 17 months, though it remained within the 2%-6% tolerance band the central bank uses to manage short-term supply shocks. Core inflation, which strips out volatile food and fuel prices, has stayed contained near 4%. Citi’s chief India economist Samiran Chakraborty said that although core and underlying inflation had risen modestly, they remained within the RBI’s comfort zone, making a rate hike unlikely in 2026 unless core inflation sustains above 4.5%. RBI Governor Sanjay Malhotra told the Hindu BusinessLine newspaper last week that signs of higher fuel prices feeding into broader inflation remained limited, though a central bank survey in May showed inflation expectations rising, and wholesale inflation climbed to 9.87% in June.
Tanay Dalal, an economist at Axis Bank, said the Monetary Policy Committee was likely to shift its language to acknowledge risks of firmer inflation and future policy action while maintaining a data-dependent approach, and expected the RBI to retain a neutral stance. Dalal said the pressure visible in wholesale prices was likely to pass through to consumer inflation over a three-to-four-month horizon, adding that while the MPC may be able to look through initial signs of firming inflation, a sustained uptick combined with rising inflation expectations could gradually narrow the central bank’s room for flexibility.
Reflecting those expectations, interest-rate swap markets are pricing in roughly 75 basis points of tightening over the next 12 months. The rupee’s slide to a record low ahead of June’s policy meeting had fuelled calls for a rate hike to defend the currency, a path similar to those taken by Indonesia and the Philippines. Instead, the RBI opted for alternative measures, including scrapping capital-gains tax for foreign holders of Indian government bonds and sweetening dollar deposit schemes for non-resident Indians, steps that have attracted nearly $40 billion in inflows and sparked a brief rally in the rupee. That rally has since faded as renewed hostilities in the Gulf pushed oil prices higher again.
Trinh Nguyen, senior economist for Emerging Asia at Natixis, said the pressure on the rupee would likely persist until the central bank raises rates, since doing so would widen rate differentials with major economies and increase the appeal of Indian assets to foreign investors. Nguyen said that compared with similarly rated markets, India was not the most compelling story from a real yields perspective, adding that while the RBI was unlikely to hike this week, the longer it waited, the more it would ultimately be pushed toward tightening.
This article was written by Eamonn Sheridan at investinglive.com.