Monetary Policy to Remain Tight as India’s FY27 Inflation Likely Above 5%

NEW DELHI – The Reserve Bank of India (RBI) is expected to keep its monetary stance aggressive throughout FY27‑28 as headline inflation is projected to stay above the 5 percent threshold, according to DBS Bank senior economist Radha Rava.

India’s GDP growth is forecast at an average 7.3 percent for the fiscal year, underpinned by solid capital inflows and a strong start to the year with a 7.8 percent annualised increase in the first quarter. However, the second half could see a slowdown due to tighter financial conditions, high energy prices and the lingering impact of a large base.

Inflation rose to 4.8 percent in August, driven by higher costs for cereals, dairy, protein‑rich foods, edible oils, and increased energy and transport expenses. A weaker monsoon and the looming threat of an El Niño could further pressure food prices.

Given these dynamics, Rava believes the RBI will continue to prioritize inflation containment, employing tools such as the policy repo rate, variable reverse repo rate (VRRR) and frequent open‑market operations to absorb excess liquidity.

The surge in foreign exchange inflows has bolstered India’s external buffers, with reserves surpassing $780 billion after the RBI’s special swap window raised $143 billion, including $133 billion via FCNR (B) deposits. Yet this inflow has also created a surplus of liquidity in the banking system, intensifying the need for careful liquidity management.

DBS expects the current‑account deficit to narrow to roughly 1.1 percent of GDP, while the overall balance‑of‑payments is likely to remain in surplus due to the capital inflow stream.

In summary, while growth prospects stay robust, inflationary trends and liquidity excess will keep the RBI’s monetary policy focused on price stability for the remainder of FY27‑28.