RBI may raise repo rate to 6.25% by H1 2027, warns Deutsche Bank, as CPI to stay around 6%

The Reserve Bank of India may raise repo rates to 6.25% by the first half of 2027, Deutsche Bank warned. It also warned that CPI inflation will persist at 6% by the end of 2026, and growth projections stay above 7% according to all major forecasters, including the IMF. The report also projects the Rupee to slide beyond 97 against the dollar and remains optimistic about the fiscal target of 4.3% of GDP in the short term.

The Reserve Bank of India has already hiked the policy repo rate by 25 basis points to 5.50% in the October MPC cycle. The next 25 basis point increase is expected by the end of December 2026, and the next 50 basis points are expected by H1 2027; this is a cumulative hike of 100 basis points amid the persistent energy crisis and inflationary pressure, with resilient growth

The report projects CPI inflation to remain 6% in October-December 2026, and 5% in FY27 and 4.7% in FY28. The report highlights the post-Diwali fuel trap: if oil marketing companies decide to hike oil prices based on the volatility in the price of Brent Crude, it will trigger an immediate upward spiral in headline CPI. It also warns that persistently high WPI inflation will eventually start to pass on to consumers. WPI inflation hovering above 11%, corporations are likely to feel the margin pressure soon.

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Deutsche Bank projects growth to be over 7% but likely to face a slowdown in the second half of 2027. It projects three macro headwinds: surging crude energy costs, a sub-par monsoon finish, and adverse base effects will result in a temporary slowdown India's growth velocity. Overall projections suggest that India's domestic economic resilience remains robust enough to absorb the projected 100-basis-point rate hike cycle without triggering a growth stall.

The Rupee is expected to depreciate beyond ₹97 against the dollar, as the RBI has managed to check the slowdown, helping the currency recover to around ₹94.50 against the US dollar. Indian rupee has lost around 6% of its value so far in 2026. India's forex reserves have declined by approximately $60 billion from their peak of $786 billion in early September.

The report notes that the central government is highly likely to meet its FY27 fiscal deficit target of 4.3% of GDP, but it will face hurdles in FY28 due to the convergence of three cost vectors: the 8th pay commission, rising import costs due to a depreciating rupee and the surging fuel subsidy.