BofA Sees RBI Rate Hike Cycle Starting December 2026
The brokerage expects the central bank to hold rates near term before a cumulative 50-basis-point hike, as inflation risks shift from geopolitics to domestic weather
Synopsis
BofA Securities believes the RBI will keep policy rates unchanged in the immediate future before raising cumulative 50 bps from December 2026 onwards. Meanwhile, the brokerage has slightly increased its GDP growth expectation for FY27 to 6.9 per cent, while it has identified food inflation driven by the monsoon season and El Nino risks as the main concerns for prices.
The change in the source of inflation risk
The Reserve Bank of India (RBI) is unlikely to hike policy rates in the near term, but BofA Securities feels a cumulative 50 basis points (bps) rate hike is likely to take place from December 2026 on-going, when inflation risks are expected to increasingly be domestic in nature.
The report says that while geopolitical risks on the radar have been replaced by local weather risks, these risks will be a big influence on the course of monetary policy going forward.
Growth Outlook Revised Uptrend
The company has upgraded its GDP growth projection for FY27 to 6.9 per cent from 6.5 per cent, due to robust demand from investment and consumption activities. In tandem with this, the report had predicted CPI inflation for FY27 at 4.8 per cent as compared to the earlier estimate of 5.1 per cent.
Monsoon and El Nino as Wild Cards
Even though the forecast for near-term inflation is benign, BofA identified certain vulnerabilities. It said that low monsoon and high chances of El Nino would further contribute to food inflation in the second half of FY27 and impact the economic activity in rural areas. But comfortable food grain stocks, better terms of trade and lower international commodity prices are expected to help the economy mitigate these risks.
Recapitalizing the external sector and fiscal position
In the external front, BofA Securities anticipates India's current account deficit to decline to 1.2 per cent of GDP in FY27, owing to the decline in oil prices, and the fiscal deficit to stay at 4.5 per cent of GDP. The supportive liquidity conditions and a more positive balance of payments position should be supportive to credit growth, it added.
Implications for Lenders and NBFCs
The non-banking financial companies (NBFCs) are projected to benefit from a favourable macroeconomic backdrop with rising credit demand due to robust consumption and investment growth, especially in the retail sector, vehicle finance and MSME lending. However, BofA said, going forward, liability management, pricing discipline and asset quality monitoring will be crucial as the outlook on inflation keeps rising and RBI is expected to raise its rates in future.
Current Policy Backdrop
Currently, RBI repo rate is 5.25 per cent, and the Monetary Policy Committee (MPC) has kept policy neutral as of June 2026. Markets will closely monitor the path BofA has set forth in the next MPC meeting on August 3–5, 2026, for early signs of how the path will play out.