BofA Securities has projected that the Reserve Bank of India (RBI) will maintain its policy rates in the near term, but anticipates a cumulative 50 basis points (bps) rate hike beginning December 2026, as domestic factors increasingly drive inflation risks.
Shift in Macroeconomic Risks
According to a report by BofA Securities, macroeconomic risks have shifted from geopolitical tensions to local weather conditions, which are expected to play a key role in shaping future monetary policy. The firm highlighted that below-normal monsoon rainfall and rising El Nino risks could fuel food inflation in the second half of FY27 and affect rural economic activity.
The report noted that comfortable food grain stocks, improving terms of trade, and softer global commodity prices are expected to cushion the economy against these risks. However, the evolving inflation outlook remains a key concern.
GDP Growth and Inflation Forecasts
BofA Securities has raised its FY27 GDP growth forecast to 6.9 per cent from 6.5 per cent, citing stronger consumption and investment demand. The firm projected FY27 consumer price index (CPI) inflation at 4.8 per cent, lower than earlier estimates, but warned that weather-related factors could push inflation higher.
The report stated that the RBI is likely to keep rates unchanged until the inflation trajectory becomes clearer, with the first rate hike expected in December 2026. The cumulative 50 bps increase would bring the repo rate to 6.75 per cent.
External and Fiscal Outlook
On the external front, BofA Securities expects India's current account deficit to narrow to 1.2 per cent of GDP in FY27 due to lower oil prices. The fiscal deficit is projected to remain at 4.5 per cent of GDP. Supportive liquidity conditions and a stronger balance of payments position are expected to support credit growth.
The report also noted that an improving macroeconomic environment will benefit Non-Banking Financial Companies (NBFCs), particularly in retail, vehicle finance, and MSME lending, as stronger consumption and investment boost credit demand.
Risks for NBFCs
However, BofA Securities cautioned that the evolving inflation outlook and expected RBI rate hikes could keep funding costs elevated for some lenders. It emphasized that liability management, pricing discipline, and asset quality monitoring will remain important for NBFCs going forward.
The report concludes that while the near-term outlook is stable, the domestic inflation risks from weather conditions and the anticipated rate hikes warrant close monitoring.
