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CIE View & Forecast

RBI’s MPC unanimously voted to keep the repo rate unchanged, while reiterating its neutral stance in line with our expectation. GDP forecast for FY27E increased by 10 bps to 6.7%. Despite the high-frequency indicators suggesting continuation of strong economic momentum, we expect growth in FY27E at 6.5%. Growth would be affected by supplychain disruption, impacting external and domestic demand on account of higher input costs and shipping costs. Inflation is expected to remain higher than the RBI’s projections of 5% as second-round effects are yet to pan out. Given the weakening growth impulses and a rising inflationary trend coupled with rising interest rates globally, we expect the RBI to hike the policy repo rate by 25 bps towards FY27 end

Repo Rate Maintained with a Neutral Stance: Upside Risk to CPI Inflation

* As expected, the RBI MPC unanimously voted to keep the policy repo rate unchanged at 5.25% and further maintained a neutral stance.

* This decision was guided by an underlying supportive growth scenario, resilient domestic demand and manufacturing, and inflation that remains anchored.

* Additionally, the RBI highlights that the growth and inflation outlook is hazy due to uncertainties regarding the south-west monsoon, El Niño, geopolitics, and global trade policy. It appears that the RBI would need greater clarity on the inflationary trend and its composition before recalibrating rates.

RBI’s Upbeat Growth View: Balanced Risks or Wishful Thinking?

The RBI projects real GDP growth of 6.7% for FY27 (+10bps higher compared to its previous forecast) with risks “evenly balanced,” and reaffirms India as the world’s fastest-growing major economy. Supporting data include Q1 listed-manufacturer net sales up 21.9%, manufacturing PMI at 54.6, services PMI at 58.7, non-food credit growth of 17.4%, and double-digit merchandise export growth. Yet the outlook rests on the same de-escalation and recovery assumptions that underpin the inflation forecast. If those fail to materialise, the annual number erodes.

* Consumption relies on offsets that may not fully compensate - The RBI acknowledges a weak-monsoon hit to rural demand, expecting partial relief from allied-sector activity and government schemes, with urban spending covering the rest. Rainfall is already 11.9% below normal, reservoirs stand at 44.4% versus 69.3% a year ago, and 15 of 36 sub-divisions are in deficit. This is no marginal shortfall. Rural demand accounts for roughly half of consumption; “partly offset” is an admission, not a solution. Urban discretionary spending faces the same crudeprice pressure.

* Investment resilience is increasingly government dependent - Heavy government capex signals still-elusive private investment and ties growth to fiscal space just as a crude-driven current-account deficit and subsidy risks could constrain it.

* External buffer thinner than the headline suggests - The external contribution looks thinner than the 15.9% merchandise-export rise suggests. Higher oil prices and elevated petroleum margins inflate the export line while imports rose faster (19.9%), widening the trade deficit to USD 86.6 Bn from USD 68.7 Bn. The RBI itself flags moderating global trade as an upside risk to the current account. Net external demand is being asked to lean on bilateral deals whose impact will take time.

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