August 5 is an important day on the economic calendar. The Reserve Bank of India’s (RBI) three-day Monetary Policy Committee (MPC) meeting concludes, with Governor Sanjay Malhotra set to announce the key policy decisions. The meeting comes amid inflation risks stemming from El Nino and the Middle East conflict.
The RBI is expected to maintain the status quo on interest rates, as economists believe India remains in a sweet spot, supported by resilient economic growth, easing inflation and strong external finances, such as CAD and BoP.
HSBC believes the RBI will keep the repo rate unchanged at 5.25% this time and resume rate hikes later this year. “We do not forecast a rate hike at the August meeting, as the RBI may prefer to see firmer inflation prints before responding and may also avoid making changes during the live Foreign Currency Non-Resident (Bank) period,” HSBC said.
Emkay also expects the RBI to continue with a data-driven, wait-and-watch approach. “We do not expect any meaningful changes to the RBI’s growth or inflation forecasts. Instead, the focus is likely to be on the impact of FCNR+ inflows on external accounts, the rupee, and liquidity management,” Emkay noted.
India is currently in a favourable macroeconomic position, HSBC said, supported by three factors – strong economic growth, easing inflation and improving external finances.
The economist expects India’s economic growth to remain in the 7% range this calendar year. “Growth has been remarkably strong on the back of several factors – favourable tailwinds from last year’s sizeable stimulus (fiscal, monetary, and regulatory easing) and front-loading of production by manufacturers and exporters,” HSBC explained.
It also expects the current account deficit (CAD) to remain manageable at around 1.5% of GDP in FY27, supported by lower gold imports and resilient remittance inflows.
The report noted that the RBI’s foreign exchange package had mobilised $41 billion by July 31, boosting capital inflows. HSBC estimates India’s balance of payments (BoP) surplus at around $40 billion in FY27, well above the 10-year average of about $25 billion.
Headline retail inflation stood at 4.4% in June, close to the RBI’s 4% target.
Liquidity management is also in focus. Instead of tightening monetary policy, the RBI is likely to rely on temporary liquidity absorption measures to manage surplus liquidity, according to Emkay.
Emkay estimates core liquidity at around Rs 5.4 trillion, while average banking system liquidity stood at around Rs 1.1 trillion in July.
Emkay expects core liquidity to peak during Q2FY27 before easing in the second half as the FCNR+ window closes and currency leakage increases.
Crude oil, El Nino among four challenges for the Indian economy
Despite the positive outlook, HSBC highlighted 4 risks that could challenge India’s macroeconomic stability.
The first is crude oil prices. “As long as oil stays around $80/barrel, the Indian macroeconomy can internalise the shock without too much disruption. Anything closer to $90 or above, on the other hand, could become disruptive,” HSBC said.
The second risk is El Nino, which is now expected to intensify during October-December and could begin affecting economic data in early 2027.
The third risk comes from higher US interest rates and a stronger dollar, which could narrow the interest rate gap between India and the US and weigh on capital flows once the FCNR(B) window closes.
Finally, HSBC said India will need to continue implementing structural reforms and trade agreements to maintain foreign investment momentum after the temporary boost from the FX package fades.
Source: The Financial Express
