The RBI MPC meeting started today amid rising crude oil prices and high US bond yields. Economists expect a rate hike to control inflation and protect the rupee. JM Financial noted, “We expect a shallow rate hike cycle starting October 26.” Weak monsoon rains also add pressure on food prices.
Crude oil prices remain elevated, bond yields have hardened and global central banks have started tightening policy. US bond yields have crossed 5%, pushing India’s 10-year government bond yield to around 7.1%. Against this backdrop, several economists believe the RBI may begin its rate hike cycle from this meeting itself.
JM Financial expects a shallow rate hike cycle
JM Financial believes the RBI is facing a difficult choice. It can either raise rates now to protect the rupee and contain imported inflation, or wait and risk more pressure from crude oil, US yields and global central bank tightening.
“We expect a shallow rate hike cycle starting October 26,” JM Financial noted.
The brokerage said the narrowing gap between Indian and US yields has made it more costly for the RBI to maintain the status quo. Higher crude prices, which rose 14% in September, can increase India’s import bill and put pressure on the rupee. This, in turn, can feed into imported inflation.
A weak monsoon is another worry for the economy. Rainfall was deficient by around 13%, while reservoir levels stood at 70.8% of full capacity. This is lower than the 10-year average of 80% and far below last year’s 89.5%.
Kharif sowing has also declined by 1.2%. Rice sowing is down 3.7%, while cereals are down 2.3%. This raises the risk of food price spikes. However, JM Financial said this is mainly a supply-side issue, where monetary policy has limited impact.
The brokerage believes excess liquidity can cushion growth even if the RBI raises rates. This means the growth sacrifice from a rate hike may be partly offset.
JM Financial expects only a minor tweak to RBI’s growth and inflation projections. However, it believes the central bank may prefer to act early to avoid falling behind the curve.
Motilal Oswal sees scope for 75–100 bps rate hikes
Motilal Oswal also believes that “the RBI could consider raising interest rates if crude oil prices remain high and inflation expectations increase.”
The global brokerage firm also sees the possibility of 75–100 basis points of cumulative rate hikes in the current cycle.
While the August inflation reading remains manageable, food inflation is close to 6%, and higher oil prices could increase transportation and other input costs. Motilal Oswal expects these pressures to push retail inflation above 6% in the third quarter of FY27 and retains its FY27 inflation forecast at 5.1%, slightly above the RBI’s 5% projection. It is important to note that the RBI is mandated to keep inflation at 4%, with a tolerance band of 2 percentage points on either side.
“Financial conditions in India are already becoming tighter through higher bond yields, liquidity absorption and higher global borrowing costs, even before a formal repo-rate hiking cycle begins.”
BoB sees RBI holding repo rate at 5.25%
Bank of Baroda, however, expects the RBI to keep the repo rate unchanged at 5.25% at its upcoming monetary policy meeting. “A rate hike at this juncture, especially ahead of the peak spending period, could slow the momentum in demand and affect growth prospects,” Bank of Baroda noted.
The economists at Bank of Baroda expect the RBI to maintain its neutral policy stance but adopt a cautious tone, as global and domestic risks have increased since its last policy meeting in August. The bank noted that headline inflation at 4.8% remains within the RBI’s 2-6% tolerance band, while domestic growth continues to remain strong. The upcoming festive season is another factor that could prompt the RBI to avoid an immediate rate hike, according to the bank.
“RBI’s decision to keep policy rate steady would send a positive signal to the market and could help in softening bond yields,” Bank of Baroda added.