Diverging Projections on Monetary Tightening
The Reserve Bank of India’s recent decision to raise its repo rate by 25 basis points to 5.50% has triggered conflicting forecasts from major financial institutions regarding the trajectory of future monetary policy. While ICRA anticipates a single additional 25-basis point hike in December, Axis Mutual Fund projects that the central bank may implement up to 75 basis points of further tightening in the near term.
The RBI’s move, which shifted its monetary stance from neutral to calibrated tightening, has elevated expectations for continued policy adjustments as inflation risks remain persistent. Both ICRA and Axis MF forecast India’s GDP growth at 7.1% for FY27 and CPI inflation at 5.2%, yet their views on the necessary policy response differ significantly based on identified economic pressures.
According to reports from BusinessToday, the central bank has simultaneously raised its FY27 inflation forecast to 5.2% from 5%, while increasing its GDP growth projection to 7.1% from 6.7%. This upward revision in macroeconomic indicators underscores the complexity facing policymakers as they balance growth targets against rising price pressures.
ICRA’s Case for a Single December Hike
ICRA expects the RBI to raise the repo rate by another 25 basis points in December, which would bring the operative policy rate to 5.75%. The rating agency indicated that this would likely be followed by a pause in rate hikes unless inflation delivers a significant upside surprise.
In its assessment, ICRA highlighted specific risks that require continued focus on containing inflation. These factors include crude oil prices, food inflation, weather conditions, and the broader normalization of inflation. The agency noted that if crude prices remain around $100 a barrel, inflation could rise to 5.3-5.5% while GDP growth could slow to around 6.8%.
Regarding market reactions to these policy expectations, ICRA expects the 10-year government bond yield to remain in the range of 7.15% to 7.35% in the near term.
Axis MF Forecasts Deeper Tightening Amid Global Pressures
Conversely, Axis Mutual Fund sees scope for another 50-75 basis points of tightening in the near term, potentially taking the operative policy rate to around 6% to 6.25%. The asset manager points to a confluence of external and internal factors keeping pressure on the RBI, including higher crude prices, a weaker rupee, elevated global bond yields, and a hawkish US Federal Reserve.
While both ICRA and Axis MF forecast FY27 GDP at 7.1% and CPI inflation at 5.2%, with key inflation risks including crude oil, food prices, weather, and geopolitics, their strategic recommendations diverge based on the intensity of expected volatility.
Axis MF estimates that the banking system currently holds a surplus liquidity of around ₹3-4 lakh crore. To manage this excess while tightening policy, the firm expects the RBI to utilize tools such as open-market operations, foreign-exchange transactions, and variable-rate reverse repos to withdraw liquidity from the system.
On the fixed-income front, Axis MF favors shorter-duration debt, particularly one-to-three-year high-quality corporate bonds. The firm recommends caution on longer-duration securities until the risk-reward profile improves, projecting that bond yields will remain in the 7.10% to 7.40% range through the remainder of 2026.
Broader Market Sentiment and Alternative Views
The debate over the pace of tightening extends beyond ICRA and Axis MF, with other institutions offering more aggressive outlooks. BusinessToday reports that SBI Research expects the RBI’s repo rate to rise to 6% by December, potentially involving a 50 basis point hike. This projection is based on the view that inflation may peak at 6.8% in November 2026.
These varying forecasts highlight the uncertainty surrounding India’s monetary policy path. While ICRA advocates for a measured approach with a pause after December, Axis MF and SBI Research suggest that more substantial tightening may be necessary to combat persistent inflationary pressures driven by global commodity markets and currency fluctuations.