Goldman sees RBI holding rates next week before back-to-back hikes

Goldman Sachs expects the Reserve Bank of India to hold its policy rate at 5.25% on Wednesday, 5 August, before raising borrowing costs in October as inflation moves back above 5%.

The RBI will announce its next monetary policy decision at the end of the Monetary Policy Committee’s 3-5 August meeting. The committee is likely to retain its neutral stance, economists Santanu Sengupta and Arjun Varma wrote in a research note published on Friday, 31 July.

Goldman continues to expect two quarter-point increases, one each in October and December. It said the increases could be delayed if inflation proves milder than forecast.

That view is more hawkish than the broader consensus. In a Reuters poll conducted from 21 to 27 July, 68 of 72 economists predicted no change in August. The median forecast showed the repo rate remaining at 5.25% through the end of 2026.

The RBI held the rate unanimously in June and retained its neutral stance. It raised its inflation forecast for the year through March to 5.1% from 4.6%, while cutting its growth projection to 6.6% from 6.9%.

Goldman expects the central bank to lower the inflation estimate modestly next week. Brent crude traded near $87.50 a barrel on Friday, below the $95 assumption used for the RBI’s June projections.

Oil has nevertheless risen about 20% this month and remains exposed to the conflict in the Middle East. That volatility, along with the risk of weaker rainfall caused by El Niño, is likely to keep the central bank cautious.

Consumer inflation accelerated to 4.38% in June from 3.94% in May, moving above the RBI’s 4% target for the first time in 17 months. Food prices and the effect of higher petrol and diesel prices accounted for much of the increase.

Goldman expects headline inflation to exceed 5% during the second half of 2026. Early food-price readings for July have been more favorable, however, while manufacturers have passed on earlier increases in input costs more slowly than expected. Petrochemical prices have also retreated from the peaks reached during the Middle East conflict.

The weather remains harder to judge. India’s monsoon deficit narrowed to 16% by 24 July from almost 40% at the end of June, helping farmers accelerate summer planting. The area under summer crops was still 5% lower than a year earlier, Reuters reported.

Stronger economic data give the RBI less reason to consider a rate cut. Industrial production rose 7.3% in June, its fastest increase in nearly two years, according to government data. Manufacturing expanded 7.8%, while electricity and gas output increased 10.6%.

Goldman said consumption remained resilient in both rural and urban markets despite June being the first full month to reflect higher retail fuel prices. It sees upside risk to its forecast of 6.9% economic growth in the second quarter of 2026.

Other economists are less confident about the wider outlook. A separate Reuters poll forecast growth of 6.6% for the current fiscal year, down from 7.7% in the previous year, as high oil prices and weak private investment weigh on activity.

Pressure on the rupee has also eased. The currency strengthened to a three-week high of about 95.26 against the dollar on Friday, supported by softer oil, foreign inflows and RBI intervention. It had fallen to a record low of 96.96 in May.

Banks have mobilized about $32 billion through the RBI’s foreign-currency schemes since June, governor Sanjay Malhotra told The Hindu BusinessLine. Most of the money came through foreign-currency deposits from nonresident Indians.

Only about $8 billion had appeared in the RBI’s foreign-currency assets by the time of Goldman’s report, reflecting the delay before banks swap those deposits with the central bank. Banking-system liquidity remained in a modest surplus equal to about 0.3% of deposits and other liabilities.

The inflows and the rupee’s recovery reduce the immediate case for using interest rates to support the currency. Whether the pause extends beyond August will depend largely on food prices, oil and how widely the recent increase in costs spreads through the economy.