MPC Poll: RBI likely to hike repo rate 25 bps as crude, global yields fuel inflation risks

The Reserve Bank of India (RBI) is likely to raise the repo rate when its Monetary Policy Committee (MPC) meets from October 5 to 7, with rising crude oil prices, elevated global bond yields and a weakening rupee adding to inflation risks.

A Moneycontrol poll of 19 economists, treasury heads and fixed-income experts showed that a majority expect the MPC to raise the repo rate by 25 basis points (bps) to 5.5 percent, which would be the first rate increase since February 2023. Only four respondents expect the central bank to keep rates unchanged.

“We expect the tone of the statement to indicate another hike in the next MPC and become data-dependent thereafter… We expect the stance to be maintained at neutral,” Anubhuti Sahay, head - India, economics research, Standard Chartered Bank, said.

The case for a rate hike has strengthened amid a sharp rise in global yields and crude oil prices, which could put pressure on domestic inflation and the rupee.

The rupee crossed the 96-per-dollar mark earlier this week, dragged down by higher Brent crude prices and elevated US yields.

Brent crude prices rose more than 1.5 percent overnight to around $107 a barrel as concerns over disruptions to energy supplies from West Asia, amid the US-Iran conflict, outweighed signs of recovering crude exports from the region.

Bond yields have also risen globally. The benchmark 10-year US Treasury yield climbed to 5.2 percent, its highest level since 2007, while the 30-year US yield touched its highest since 2004.

In India, the benchmark 10-year government bond yield breached the psychologically significant 7.20 percent threshold on Thursday, closing at its highest level in two and a half years at 7.21 percent. The yield is expected to inch up further to 7.50 percent levels as crude oil prices remain high and amid expectations of a rate hike by the central bank next week. The 10-year yield had previously closed at 7.18 percent.

Bond prices and yields move inversely.

Inflation risks

Most respondents expect the RBI to retain its inflation forecast for the current fiscal year, although some expect an upward revision as crude and food prices rise.

The RBI had cut its FY27 inflation projection to 5 percent from 5.1 percent in its previous review. The August MPC minutes said it would closely watch oil prices and resulting supply-chain disruptions.

Retail inflation rose to 4.82 percent in August from 4.45 percent in July.

“There is some upside risk to RBI CPI inflation with food inflation showing a broad-based rise. Moreover, the crude oil price shock has persisted longer than expected which raises risk of inflation pressures broadening,” said Gaura Sen Gupta, chief economist at IDFC First Bank.

“Domestic conditions support gradual normalisation of monetary policy with FY27 CPI inflation likely to rise to 5.2 percent. The rise in inflation remains supply side led primarily food and fuel. However, there is a gradual rise in core inflation momentum. Producers are passing on input cost pressures,” she said.

Crisil’s principal economist Dipti Deshpande expects inflation at 5.1 percent, while Yes Bank chief economist Indranil Pan expects it at around 5 percent. Union Bank of India’s chief economist expects inflation to be around 5.2-5.3 percent.

SBI Research has taken a more hawkish view. It expects the RBI to raise rates by at least 25 bps in October, citing broadening inflationary pressures, worsening global macro conditions, evolving liquidity conditions and renewed repricing of global risks.

The report also said CPI inflation could rise to 5.65 percent in September and cross 6.5 percent in October and November before easing below 6 percent in early 2027.

Growth outlook

Market participants largely expect the RBI to retain its FY27 growth forecast despite a stronger-than-expected 7.8 percent GDP growth reading in the first quarter.

The RBI has projected real GDP growth at 6.7 percent for FY27.

Some economists have raised their growth forecasts but remain cautious about the external environment, which could weigh on growth in the second half.

“Given the stronger-than-anticipated growth in the first quarter, we have raised our GDP growth forecast for this fiscal to 7% from 6.6%... Nevertheless, growth is likely to moderate in the second half of the fiscal,” Deshpande said.

SBI Research, meanwhile, expects the RBI to raise its FY27 GDP forecast by 30 bps and its inflation forecast by 20 bps.

Liquidity remains in focus

Liquidity is another key issue ahead of the policy.

Following strong foreign currency non-resident bank (FCNR-B) inflows, the RBI has conducted variable rate reverse repo (VRRR) auctions over the past two weeks and announced open market operations to manage excess liquidity.

FCNR-B inflows under the special swap facility reached nearly $133 billion, although the rupee has yet to appreciate meaningfully.

System surplus liquidity, which touched around Rs 12 lakh crore earlier this month, has since declined to around Rs 4.75 lakh crore after RBI measures to absorb excess cash.

SBI Research, however, said the headline increase in deposits following FCNR(B) inflows may overstate the effective liquidity available for lending. While the inflows add to bank deposits, banks still face regulatory requirements such as CRR, SLR and LCR, which require a portion of incremental resources to be maintained with the RBI or in prescribed liquid assets rather than deployed as fresh credit. The research house said these constraints make the effective liquidity creation from the deposit inflows more muted than the headline numbers suggest.

SBI Research estimates that to support 16 percent credit growth in FY27, banks would need about Rs 48.2 lakh crore of incremental deposits, compared with an estimated Rs 40 lakh crore of incremental deposits, leaving a gap of Rs 8.2 lakh crore even after the FCNR(B) inflows.