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RBI May Raise Repo Rate to 5.75-6% in FY27
The Reserve Bank of India may raise interest rates in the second half of FY27.
A report says the repo rate could rise from 5.25% to between 5.75% and 6%.
The report expects two or three increases of 25 basis points each.
It says the increases may start in December.
Large foreign-currency inflows have added a lot of money to Indian banks.
This extra money could make it harder for the RBI to manage inflation and liquidity.
The RBI may first remove some extra money using special banking operations.
An October increase is still possible if the US Federal Reserve raises its rates in September and the RBI first takes other steps.
Union Bank of India expects two to three 25-basis-point repo-rate increases from the current 5.25%.
Under its base case, the rate-hike cycle could begin in December and reach 5.75-6% in H2 FY27.
Special swap-related foreign-exchange inflows reached about $136 billion by August 31.
Core banking-system liquidity rose to ₹8.05 trillion by mid-August from ₹4.82 trillion in mid-June.
The RBI may use VRRR operations, incremental CRR, bond sales or foreign-exchange swaps to absorb surplus liquidity.
- Who
- The Reserve Bank of India and Union Bank of India, whose report assesses the RBI’s likely policy path.
- What
- The RBI may raise its repo rate to 5.75-6% in H2 FY27 and use other measures to absorb excess banking liquidity.
- Where
- India; the report was issued from New Delhi.
- When
- The report expects rate increases to begin in December, while an October hike remains possible; the forecast concerns H2 FY27.
- Why
- Foreign-exchange inflows have increased banking-system liquidity, while rising inflation and strong economic growth may require tighter monetary conditions.
Base-Case Rate-Hike Outlook
Conditional or Delayed-Hike Outlook
Timing of rate increases
Base-Case Rate-Hike Outlook
Union Bank of India expects the rate-hike cycle to begin in December, with two to three increases in H2 FY27.
Conditional or Delayed-Hike Outlook
An October increase cannot be ruled out, but only if the US Federal Reserve raises rates in September and the RBI first absorbs excess liquidity through durable measures.
Initial policy response
Base-Case Rate-Hike Outlook
The RBI may need tighter policy to contain rising inflation and manage excess liquidity amid strong economic growth.
Conditional or Delayed-Hike Outlook
The RBI is expected to initially rely on temporary, reversible liquidity measures as credit demand strengthens in H2 FY27, rather than immediately depending only on rate hikes.
Key facts
- Current repo rate
- 5.25%
- Projected repo rate
- 5.75-6% in H2 FY27
- Expected rate increases
- Two to three hikes of 25 basis points each
- Special swap inflows
- About $136 billion as of August 31
- Core liquidity
- ₹8.05 trillion by mid-August, up from ₹4.82 trillion in mid-June
- Possible liquidity tools
- Short- and longer-term VRRR operations, incremental CRR, bond sales and foreign-exchange swaps
- Possible timing
- December is the base-case starting point; an October hike cannot be ruled out
Quotes
Union Bank of India report
A report by Union Bank of India forecasting the RBI’s monetary-policy outlook
“After getting dollar flows, now rupee liquidity management is key policy challenge for RBI”
thehansindia.com
“Rate hikes are back on the table for H2 FY27”
thehansindia.com
Sources
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