RBI may hike repo rate to 6.25% by H1 2027, warns Deutsche Bank as inflation risks persist

The forecast is more hawkish than market expectations and reflects the possibility of economic growth remaining above 7% even as inflation stays elevated.The RBI's monetary policy decisions will be closely watched as policymakers balance price stability with the need to sustain economic growth amid uncertainty in global energy markets.Inflation outlook remains a concernDeutsche Bank expects consumer price index (CPI) inflation to average 6% in October-December 2026, 5% in FY27 and 4.7% in FY28.The report flagged upside risks to inflation if domestic fuel prices are increased after Diwali.

It also warned that wholesale price inflation exceeding 11% could result in higher input costs being passed on to consumers, adding to retail inflationary pressures.Household inflation expectations have risen to 10% from 8% before the West Asia conflict, according to the report. The increase raises concerns about second-round effects, in which higher prices influence wage demands, business costs and future price-setting decisions.These factors could complicate the RBI's efforts to bring inflation under control and strengthen the case for further monetary tightening.GDP growth expected to remain above 7%Despite the inflation risks, Deutsche Bank expects India's real gross domestic product (GDP) growth to remain above 7% in both FY27 and FY28.However, the report cautioned that economic momentum could moderate in the second half of FY27.

Higher crude oil prices, a below-normal monsoon and an adverse base effect following the previous year's goods and services tax (GST) rate cuts could weigh on growth.Higher energy costs could also increase pressure on businesses and households, potentially affecting consumption and investment.Rupee may weaken beyond 97 per dollarThe report highlighted continuing risks to the Indian rupee despite recent RBI measures that temporarily reduced dollar demand and helped the currency recover to around ₹94.50 against the US dollar.India's foreign exchange reserves have declined by approximately $60 billion from their peak of $786 billion in early September.

Deutsche Bank expects the rupee to weaken beyond ₹97 per dollar during 2027 if the global macroeconomic environment does not improve meaningfully.Fiscal deficit target achievable, but risks remainOn the fiscal front, Deutsche Bank expects the Centre to meet its FY27 fiscal deficit target of 4.3% of GDP, supported by the RBI's dividend transfer and possible expenditure adjustments.However, fiscal consolidation could become more difficult in FY28 because of elevated oil prices, higher subsidy requirements and the potential expenditure implications of the 8th Pay Commission.The bank said maintaining price stability alongside financial stability would remain critical as India navigates external economic uncertainty.