CPI inflation reached 4.82 per cent in August 2026, up from 4.45 per cent in July. Rising global prices and a weak rupee suggest a rate hike is needed. While the RBI kept rates unchanged, WPI inflation hit 9.92 per cent. Many experts feel a hawkish stance could help the economy.
Has the time for a rate hike finally arrived? In retrospect, as we had argued earlier, given the global and domestic inflationary trends, a pre-emptive rate hike would have helped (businessline, August 3 and May 4, 2026). The contours of what lay ahead were becoming increasingly visible through the last two quarters.
Three factors have made a rate hike desirable: First, domestic inflationary headwinds, fuelled by the global conditions, suggest that a hawkish stance could help. Both CPI and WPI have headed northwards in the last four months. Second, given global inflationary trends, it was only a matter of time before the Fed raised the rates, making “follow the Fed” imperative to prevent capital outflows. Third, given the sustained depreciating trend in rupee, brought about by FII outflows, a higher rate differential could help.
Confusing signals
However, the RBI has so far chosen to keep interest rate unchanged, yet sending somewhat confusing signals through minutes, rate and stance decisions in its Monetary Policy Committee meetings. As for the domestic situation, CPI inflation came in at 4.82 per cent in August, up from 4.45 per cent in July, to an eight-month high. As is the case with India’s inflation story, CPI food and beverage inflation climbed faster reaching 5.66 per cent in August, up from 5.24 per cent reported in July. Onion inflation (over 48 per cent) stood out in this context.
In August 2026, core inflation also crossed 4 per cent, indicating greater pass through and generalised price pressure. Reflecting global price conditions, WPI inflation rose to 9.92 per cent in August 2026, up from 9.78 per cent in July — staying near double digits for the past four consecutive months. Crude prices are at over $100/barrel and likely to continue, and rupee-dollar exchange rate again sniffing 96 thresholds, despite buoyant FCNR inflows. The Chart shows the usual “three’s trouble” dynamics in crude, rupee and inflation.
Second, US interest rate has been raised by 25 bps, so that sustained pressure on capital outflows is likely to continue. Will MPC consider the above developments as ‘risks are evenly balanced’? In this context, it is instructive to look at how the RBI has responded to inflationary conditions in the past.
How many times in the last 20 years has the central bank raised rates and at what inflation range? As the Table shows, the average inflation that made the RBI raise rates is above 6 per cent, veering close to 6.25 per cent. In each of these tightening episodes inflation had remained persistently elevated and Fed was in hawkish mode. The episodes of repo rate increase in 2018, considered as exceptions, coincide with RBI’s adoption of a new monetary policy framework of Flexible Inflation Targeting.
Besides those episodes, the FIT target of 4 per cent largely seems out of sync with reality for inflation control. Therefore, going by past experience, the MPC is unlikely to change the repo rate in the October 2026 policy on the basis of inflation alone— unless the Fed rate hike and the rupee pressures in its aftermath become dominant. Post the Fed hike, the rupee has continued to be under pressure, reaching a low of 96.30 as of October 5, 2026.
Hawkish stance may help
With domestic credit growth already at a multi-year high and liquidity conditions showing signs of exuberance given the expected FCNR flows, a rate hike, or at least a hawkish stance may help.
The general trend of geopolitical tensions is further intensifying and is likely to remain firm in the near term. So are the inflationary trends. In this situation, with so many outside vulnerabilities and uncertainties, exchange rate is but one of the considerations. Holding on to exchange rate stability through schemes like FCNR(B), which lead to large-scale build-up of future liabilities, is questionable when geopolitical conditions are unpredictable.
Das is ICICI Bank Chair Professor, IIM Ahmedabad; Trivedi is Associate Professor, National Institute of Bank Management. The views are personal