The Reserve Bank of India may raise the repo rate by 25 basis points in October, according to a report by Union Bank of India. Further hikes could take the rate to 5.75-6 percent in FY27. High crude oil prices and rising global yields have kept government bond markets under pressure.

RBI May Raise Repo Rate by 25 bps in October: The Reserve Bank of India (RBI) may raise the repo rate by 25 basis points in October, according to a report by Union Bank of India. The report said further rate hikes could follow in FY27 as inflation risks remain. The repo rate could rise to 5.75-6 per cent, it said.

The expected rate hikes could put further pressure on government security (G-Sec) yields.

G-Sec yields remain under pressure

Indian government bonds remained under pressure in September. High crude oil prices and rising global yields increased expectations of RBI rate hikes.

Higher domestic bond supply also added to the pressure. This included RBI open market operation (OMO) sales and increased issuance of long-term government securities in the second half of the borrowing calendar.

The pressure was particularly visible in the five-year segment.

The report said the five-year G-Sec yield rose by 45 basis points in September. The 10-year G-Sec yield increased by 24 basis points during the same period.

As a result, the spread between the 10-year and five-year G-Sec yields narrowed to 16 basis points from 36 basis points.

Government borrowing to add to bond supply

The government plans gross dated G-Sec borrowing of Rs 7.86 lakh crore in the second half of FY27, the report said. The gap between budgeted and projected gross borrowing is around Rs 1.1 lakh crore.

However, net borrowing is expected to remain broadly unchanged. This is because redemption requirements have been reduced through aggressive switch auctions.

Bond switches have deferred repayments and reduced redemption and refinancing requirements in FY27, according to the report.

Higher Treasury bill issuance and moderately higher state borrowing are also expected to add to market supply.

RBI absorbs surplus liquidity

The report said the RBI continues to absorb the FCNR(B)-led surplus through variable rate reverse repo (VRRR) auctions, OMO sales and foreign exchange swaps.

OMO sales totalled Rs 1 lakh crore across three September auctions.

These operations helped reduce the banking system's liquidity surplus to Rs 4.85 lakh crore as of September 30. The surplus stood at Rs 11.16 lakh crore on September 6.

Broad CRR hike appears less likely

According to the report, a broad-based cash reserve ratio (CRR) hike appears less preferred. The lender noted that the RBI had earlier exempted eligible FCNR(B) deposits from reserve requirements.

Repo rate may reach 5.75-6%

Union Bank of India expects a 25-basis-point rate hike, followed by one or two additional hikes during the rest of FY27. This could take the repo rate to 5.75-6.00 per cent, the report said.

The lender also expects hawkish guidance from the RBI, with continued focus on inflation.

The report said the 10-year G-Sec yield could face further upward pressure if monetary policy tightening coincides with persistently high crude oil prices, rising global yields and subdued demand at government bond auctions.

What is repo rate?

The repo rate, short for repurchase rate, is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. It is one among the several monetary policy tools available to a central bank that are crucial in regulating the economy and controlling inflation.