RBI MPC October 2026: Rate hike dilemma deepens as crude, rupee pressures mount; experts weigh in

RBI faces rate-hike dilemma

JM Financial said global central banks have already entered a tightening cycle, increasing the likelihood of similar action by the RBI. It said this appears to be the start of a broader global rate hike cycle rather than a one-off move, led mainly by the US Federal Reserve as it seeks to bring inflation towards its 2 per cent target.

A rate hike could help the RBI conserve foreign exchange buffers, but would also mark a shift from its earlier dovish stance. On the other hand, keeping rates unchanged could become increasingly costly as the yield differential between India and the US narrows.

The brokerage said the timing will depend largely on whether crude oil prices remain elevated and whether the Fed raises rates again in October. While markets expect the Fed to hold after weaker-than-expected PCE inflation in August, US GDP growth in Q2CY26 came in at 2.2 per cent against expectations of 1.5 per cent, while the Q3 nowcast stands at 3.7 per cent.

JM Financial said global markets are positioned for three to four Fed hikes from December 2026, a trend it said has already shown up in the sell-off in precious metals.

Liquidity, rupee add to RBI's challenge

Despite draining Rs 6.4 trillion of excess liquidity through variable rate reverse repos, currency swaps and open market operations, system liquidity remains more than twice the appropriate level at Rs 4.8 trillion, JM Financial said.

Call money rates have hardened marginally but, at 5.12 per cent, remain below the policy rate. The brokerage said excess liquidity could cushion growth and partly offset the sacrifice from a rate hike.

However, if the MPC keeps rates unchanged, pressure would shift to the rupee and require foreign exchange intervention. JM Financial said this could prove costly after forex reserves fell $14.8 billion in the week ended September 18 amid uncertainty linked to the West Asia crisis, higher crude prices and stronger dollar demand.

Inflation risks from weak monsoon

JM Financial also flagged inflation risks from a 15 per cent rainfall shortfall, lower kharif sowing and depleted reservoir levels, with super El Nino conditions potentially lasting until February 2027.

Maharashtra, Tamil Nadu and Karnataka have reported drought-like conditions, while reservoir levels across India have fallen to 71 per cent, against the long-period average of 78 per cent and 90 per cent in the corresponding period last year.

The brokerage said rabi sowing in rain-fed states could come under pressure, with possible implications for state development loan yields. However, it noted that any resulting food inflation would be a supply-side issue, against which monetary policy is less effective. JM Financial said markets are already bracing for RBI action, and the rising cost of holding rates may make an October frontloaded hike the more likely outcome.

What experts expect

Atul Monga, CEO & Co-Founder, BASIC Home Loan, said, “With expectations of a rate hike strengthening ahead of the October MPC meeting, the RBI’s key challenge will be to balance emerging inflationary pressures with the need to sustain economic growth and credit demand. Elevated crude oil prices, a broader pickup in inflation and changing global rate dynamics have increased the case for a calibrated policy response, although the pace and timing will ultimately depend on how these factors evolve.”

Pushpender Singh, Managing Director, JMS Group, said, “The RBI faces a delicate balance between managing domestic inflation and navigating global economic ripples. We expect a ‘hold’ strategy to prevail, providing a sense of continuity.”

Similarly, Rishabh Periwal, Sr. Vice President, Pioneer Land and Infrastructure, believes that the RBI finds itself in a challenging spot with global tensions simmering and crude oil prices remaining volatile. The central bank is expected to maintain a cautious stance.

“Given the uncertain global economic environment, the RBI's June policy announcement carries significant importance for industries dependent on consumer sentiment and long-term financing, such as real estate,” said Rajan Yadav, Director, Roots Developers. “Lower interest rates not only make homeownership more accessible but also encourage investment activity across residential and commercial segments.”