RBI's Future Interest Rate Hike Predicted Amid Inflation Concerns

The Reserve Bank of India is expected to maintain its current policy stance but may raise interest rates later this year due to rising inflation. BofA Securities forecasts a 50 basis point increase starting December 2026, driven by domestic inflation trends. The report highlights a shift in risks from geopolitical issues to weather-related factors, particularly the monsoon and El Niño. Additionally, India's GDP growth estimate for FY27 has been upgraded to 6.9%, while CPI inflation is projected at 4.8%. The report also discusses the potential impact on Non-Banking Financial Companies (NBFCs) amid changing monetary policies.

By Narendra Chaudhary Jul 10, 2026, 17:27 IST

RBI's Policy Outlook and Inflation Dynamics

The Reserve Bank of India (RBI) is likely to keep its current monetary policy unchanged in the near term. However, analysts at BofA Securities anticipate that the central bank may start increasing interest rates later this year due to rising domestic inflation. They predict a total increase of 50 basis points in policy rates beginning December 2026, driven by domestic inflation trends rather than external factors.

The report indicates a significant shift in the risks affecting India's monetary policy. Previously, geopolitical tensions were the main concern, but now, weather-related issues, especially the performance of the monsoon and potential El Niño effects, are expected to play a more crucial role in influencing inflation and economic growth.

BofA Securities has revised its GDP growth forecast for India for FY27 to 6.9%, up from the earlier estimate of 6.5%. This adjustment reflects anticipated increases in consumer spending and investment activity, which are expected to bolster overall economic growth.

Additionally, the firm has lowered its forecast for FY27 consumer price index (CPI) inflation to 4.8%. Despite this downward adjustment, they warn that inflation risks could rise, particularly in the latter half of the financial year if monsoon rainfall is subpar.

The report highlights that insufficient rainfall and a higher likelihood of El Niño could lead to increased food prices, adversely affecting rural incomes and demand.

Weather-Related Risks and Economic Resilience

While weather risks are a concern, BofA Securities believes that several factors may mitigate their impact on the economy. Adequate food grain stocks, improving trade conditions, and declining global commodity prices are expected to act as buffers against inflation.

On the external front, the brokerage predicts further improvement in India's current account deficit, estimating it at 1.2% of GDP for FY27, primarily due to lower international crude oil prices. The fiscal deficit is projected to remain stable at 4.5% of GDP.

The report also emphasizes that favorable liquidity conditions and a stronger balance of payments position should support credit growth throughout the financial system.

Opportunities and Challenges for NBFCs

According to BofA Securities, the improving macroeconomic landscape is likely to create advantageous conditions for Non-Banking Financial Companies (NBFCs). The report notes that heightened consumption and investment demand could enhance lending activities, particularly in sectors like retail finance, vehicle loans, and credit for micro, small, and medium enterprises (MSMEs).

However, the report also points out potential challenges for lenders if the RBI initiates a tightening of monetary policy starting in December 2026. Increased policy rates could lead to higher funding costs, which may pressure profit margins for some NBFCs.