RBI rate hikes back on the table as inflation risks mount

The expected hike comes as a surge in global commodity prices threatens to fan inflation, which rose to a 22-month high of 4.8% in August—above the central bank's 4% midpoint target. Consumer prices are also under pressure from a deficient monsoon and imported inflation amid a weakening rupee.

"Since the last policy, the global environment has completely changed with higher rates and growth holding up along with a build-up of inflation," said Sameer Narang, chief economist at ICICI Bank.

"Inflation in Q2 should be above RBI's trajectory with below-normal monsoon pushing food prices higher. However, the global environment may change once again, which doesn't call for committing to any path because of which stance change may not be required," Narang said.

Bringing forward

Rising inflationary pressures and a wave of rate hikes by global central banks, including the US Federal Reserve, have led economists to move up their expectations for India's rate increases from December or February.

"There are two reasons why we are changing the timing of rate hikes to October and December (25 basis points each), from our earlier expectation of December and February 2027 of 25 bps each, attuned to the current reality of elevated global oil prices, we expect upward revisions to both the growth and inflation forecasts, which offer a solid backdrop to commence a monetary tightening cycle," Barclays said in a report on 1 October.

The inflation outlook is the clearest reason for the expected hike. Economists see price pressures broadening beyond a few food items, with higher crude oil prices, a weak monsoon and rising global commodity costs adding to the risks. The RBI's August forecast put consumer price index (CPI) inflation at 5% for fiscal year 2027 (FY27), but several economists now expect the central bank to raise that projection.

Barclays expects FY27 inflation to be revised higher from 5%, with its own forecast at 4.8%, but with upside risks if crude remains above $100 a barrel. It also expects another round of retail fuel-price increases if elevated oil prices persist. Gaura Sengupta, chief economist at IDFC FIRST Bank, expects headline CPI inflation for FY27 at 5.2%.

Headwinds

“The September FOMC (Federal Open Market Committee) hike, elevated US Treasury yields and our expectation of further Fed tightening reinforce the case for earlier RBI rate action, particularly amid renewed Middle East conflict-driven upside risks to global crude oil prices,” according to a Goldman Sachs report, adding that it expects the RBI to raise rates by 25 bps in October and December each.

Broadly, economists expect the RBI’s hiking cycle to extend beyond October, but see it as shallow, with most forecasts clustered around 50-75 bps of cumulative tightening and the cycle likely to run through December or February 2027. The RBI’s last rate-hiking cycle ran from May 2022 to February 2023, during which the MPC cumulatively raised the repo rate by 250 bps.

Meanwhile, growth is giving the RBI greater room to prioritise price stability over supporting demand. GDP growth of 7.8% in April-June was 80 basis points above the RBI’s August forecast.

High-frequency indicators suggest that momentum has remained relatively firm in the second quarter, even though some indicators have moderated. That strength is prompting economists to expect the RBI to raise its FY27 growth forecast from 6.7%.

Strong growth

Barclays has lifted its own FY27 growth projection to 7.1%, citing stronger-than-expected Q1 performance, while Sengupta expects growth of around 7.5% in FY27, although she sees some moderation in the second half from the high base, led by weaker rural demand and pressure on corporate margins.

BofA Global Research is even more hawkish and expects the RBI to revise its growth estimate higher. It has raised its forecast for cumulative rate hikes to 100 bps from 50 bps earlier, with a 25 bps hike in October as the starting point.

Madan Sabnavis, chief economist at Bank of Baroda, is the only outlier, expecting the RBI to leave the repo rate unchanged in October. His rationale is that a hike just before the festival season could weigh on consumption and that the RBI could wait for more clarity from September and October inflation data. Even so, Sabnavis expects 50-75 bps of hikes over the cycle.

“If rates are hiked while transmission is direct for lending, deposit rates will be sticky as there are surplus funds with banks. By keeping repo rate unchanged, which the market is not expecting, we can see tempering of bond yields,” Sabnavis said.

On liquidity, economists expect the RBI to drain excess funds from the banking system. Led by the central bank’s measures, India garnered $143.6 billion between 8 June and 31 August through foreign currency non-resident deposits, external commercial borrowings and offshore foreign currency borrowings, which led to excess liquidity.

Subhana Shaikh

Subhana Shaikh is a business journalist at Mint, where she covers the Reserve Bank of India, monetary policy, and India’s bond markets. She has seven years of experience in reporting on financial markets, with a focus on banking and the broader financial system.She began her career after completing her postgraduate diploma at the Indian Institute of Journalism and New Media, Bengaluru. She then spent five years at Informist Media, a news wire agency, where she closely tracked bond markets and the BFSI sector, developing a strong foundation in market reporting. She later moved to NDTV Profit, where she expanded her coverage across a wide range of business and economic stories.At Mint, Subhana focuses on explaining central bank decisions, bond market movements, and banking trends for her readers. Her reporting combines on-ground inputs with careful analysis to help audiences understand complex financial developments.Based in Mumbai, she is interested in exploring stories across the business landscape. Outside of work, she enjoys reading and spending time with her three cats.