HSBC sees RBI raising repo rate by 0.50% in 2026-27

The brief

Context

India's Reserve Bank has been holding policy rates while inflation stayed subdued and growth surprised on the upside, with June-quarter GDP growth at 7.8%. An HSBC Global Investment Research report now argues that the next move in the rate cycle will be upward, not downward: it expects two hikes of 0.25% each in 2026-27, taking the repo rate to 5.75%. The trigger, it says, is a build-up of inflation pressure from El Nino-driven food prices, a possible rebound in Brent crude and firms passing on higher input costs. The report also flags surplus liquidity of Rs 5-6 lakh crore from FCNR(B) deposits that the RBI may drain through open market operation sales.

Key facts

• HSBC Global Investment Research expects the RBI to raise the repo rate twice in 2026-27, by 0.25% each, taking it to 5.75%.
• The RBI's own estimate, cited in the report, is that inflation will average above 5% over the next three quarters.
• The report says inflation could reach 5% by the end of 2026-27 if companies pass higher raw material costs on to consumers.
• FCNR(B) deposits have brought Rs 5-6 lakh crore of surplus liquidity into the system, which the RBI may absorb via open market operation (OMO) sales.
• GDP growth in the June quarter was 7.8%, aided by strong consumer demand and manufacturing activity.
• Government capital expenditure rose 40%, alongside GST and excise duty cuts and higher subsidies, supporting June-quarter growth.
• HSBC projects GDP growth of 7.2% in 2026-27, moderating on a high base and slowing government capital spending.
• The current account deficit is projected to widen to 1.3% of GDP in 2026-27 from 0.6% in 2025-26; the fiscal deficit may overshoot budget estimates by 0.5% of GDP.

Timeline

1. JuneBrent crude oil prices eased somewhat, but the report expects them to pick up again.
2. June quarter (current fiscal year Q1)India's GDP growth touched 7.8% on strong consumption and manufacturing.
3. July-September (Q2 of current fiscal)RBI estimates GDP growth will be recorded above 7%.
4. December quarterEl Nino conditions may intensify, pushing food inflation higher, the report says.
5. Next three quartersRBI expects inflation to average above 5%.
6. 2026-27HSBC expects two 0.25% repo rate hikes to 5.75%, GDP growth of 7.2% and CAD at 1.3% of GDP.

Who has a stake

• Reserve Bank of India — Must balance above-5% inflation against strong growth while deciding on rate hikes and draining surplus liquidity through OMO sales.
• Borrowers and banks — A 0.50% cumulative repo hike to 5.75% would raise lending and deposit rates, affecting loan EMIs and credit demand.
• Consumers — Face higher food inflation from El Nino and possible pass-through of higher raw material costs by companies.
• Companies — Decide whether to absorb or pass on higher input costs, which the report links to inflation touching 5% by end-2026-27.
• Union government — GST and excise cuts, higher subsidies and 40% higher capex supported growth, but the fiscal deficit may exceed budget estimates by 0.5% of GDP.
• Farmers and rural economy — Deficient rainfall could cut crop yields, hurting farm incomes and adding to food price pressure.
• NRI depositors / external sector — FCNR(B) inflows of Rs 5-6 lakh crore add liquidity; the CAD widening to 1.3% of GDP signals larger external financing needs.

Why it matters

A shift from rate cuts to rate hikes would change borrowing costs for households, firms and the government, and signals that the inflation-growth trade-off is tightening. With El Nino threatening food prices, crude possibly rebounding and the current account deficit set to more than double to 1.3% of GDP, India's macro comfort of low inflation and easy liquidity may be ending even as growth stays near 7%.