Bond.az - The Reserve Bank of India (RBI) is expected to keep interest rates unchanged at its June monetary policy meeting while adopting a more hawkish tone, according to a BofA Global Research report.
The central bank faces a difficult balancing act between supporting economic growth and defending the rupee, which has come under pressure amid global geopolitical tensions, rising commodity prices, and widening trade deficits.
BofA noted that India's domestic economic conditions do not justify an immediate rate hike. Consumer price inflation was 3.48% in April, below the RBI's 4% target, while economic growth remains moderate and industrial activity shows limited signs of overheating.
Although wholesale inflation has surged due to higher global commodity and energy prices, the pass-through to consumer prices has been limited. Core inflation remains stable at around 3.7%.
Financial markets are pricing in future rate hikes. According to BofA, investors expect more than 100 basis points of tightening over the next year due to concerns over rupee weakness and imported inflation.
The conventional response to currency weakness would be to raise interest rates. However, BofA questions whether a small increase would be effective, arguing that only a large hike would significantly influence market sentiment.
BofA expects inflation pressures to build in coming months due to higher fuel and energy costs. Headline inflation could rise above 5% by September 2026 and remain elevated. Weather-related risks from a potential El Niño event also loom.
Despite these risks, the RBI is unlikely to tighten policy immediately. The central bank has continued injecting liquidity, signaling a preference for supporting growth. Inflation remains below target and real interest rates are positive.
BofA's base case is a "hawkish hold" in June - keeping rates unchanged while signaling readiness to act later. The first rate hike could come in the second half of 2026, possibly in December.
"The June meeting is likely to be more about preparing markets for future tightening than delivering an immediate hike," the report said.
