RBI could hike rates twice this fiscal amid energy and climate risks, says HSBC

India’s inflation trajectory could face fresh pressure in FY27 as rising global energy prices and the possible impact of El Niño weather conditions threaten to increase food and industrial costs, according to a new report by HSBC. The report said these combined shocks may force the Reserve Bank of India to raise interest rates twice during the current financial year to contain inflationary risks.

HSBC projected that headline inflation could average 5.6 per cent in FY27 after factoring in the impact of elevated crude oil prices and temperature-related disruptions to agricultural output. The report warned that the overlap of energy shocks and adverse climate conditions could create a difficult environment for policymakers attempting to maintain economic stability.

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According to HSBC, the impact of El Niño and rising temperatures alone could add nearly 0.5 percentage points to inflation over a one-year period. The report noted that food inflation remains especially vulnerable to weather-related disruptions, particularly in a country like India where monsoon patterns play a crucial role in agricultural production and rural consumption.

“With the energy and El Niño shocks coinciding, the FY27 outlook needs attention. Our model suggests the El Niño/temperature channel can add 0.5ppt to inflation over a year,” the report stated.

Based on this assessment, HSBC expects the RBI to deliver two rate hikes during the fourth quarter of FY26 and the first quarter of FY27, which could take the repo rate to 5.75 per cent.

The report also highlighted broader economic concerns beyond inflation. It said rising fuel prices, higher industrial feedstock costs, and climate-linked disruptions may slow economic momentum and place additional stress on India’s informal sector, including rural households and small businesses.

HSBC warned that the central bank may increasingly face a policy dilemma between controlling inflation and supporting growth. Higher interest rates typically help contain inflation but can also dampen borrowing, investment, and consumption demand.

The report added that the combined effect of energy market volatility and climate shocks could reshape the current drivers of India’s economic growth, making FY27 a particularly challenging year for monetary policymakers.