India: Higher CPI risks drive FY27 hike call – Standard Chartered

Standard Chartered Bank economists Anubhuti Sahay and Saurav Anand now expect the Reserve Bank of India’s repo rate to rise by 50bps to 5.75% in FY27, starting in June. They link this to a higher FY27 CPI forecast of 4.9%, INR depreciation and global yield pressures, and flag additional upside risks to rate hikes if commodity prices and INR weakness persist.

Standard Chartered revises FY27 rate path

"We revise our repo rate forecast to a cumulative 50bps of hikes to 5.75% in FY27 (year ending March 2027), from our earlier status quo call of 5.25%. This reflects an upward revision to our FY27 CPI forecast to 4.9% from 4.7% and increased depreciation pressure on the Indian rupee (INR). While the MPC has reiterated that its repo rate decisions are driven more by domestic growth and inflation dynamics than by the need to defend the currency, the sharper-than-expected pace of INR depreciation (INR is trading at 96.80 versus our June-end forecast of 93) raises the risk of second-order effects on CPI and, in our view, strengthens the case for a hike."

"We now think the Monetary Policy Committee (MPC) is likely to begin hiking from the June meeting, as domestic inflation risks are rising alongside higher global yields; a few Asian central banks have already delivered surprise hikes."

"Our revised four-quarters-ahead CPI inflation forecast is now at 5.1%, versus our prior forecast of 4.7% and last year CPI of 2.1%. While inflation would likely remain within the MPC’s mandated 2-6% target range, with 4% as the medium-term target, the risk of persistent inflation is, in our view, likely to trigger a policy response."

"We expect 50bps of hikes, split equally between June and August. However, if there is no hike in June, the repo rate could be hiked by 50bps in August."

"We also see a risk of additional 25-50bps of hikes in FY27 if inflation turns out to be higher than we expect due to continued pressure from commodity prices and INR weakness."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)