7 hrs ago
Economists Expect RBI Rate Hikes as Inflation Breaches Tolerance Band
Prices in India have been rising faster, especially for some foods and fuel.
The Reserve Bank of India, or RBI, may respond by making borrowing more expensive.
Economists mostly expect two small rate increases of 25 basis points each.
They expect these increases to happen around the RBI’s October and December meetings.
Inflation could rise above the RBI’s preferred limit of 6 percent.
Vegetable prices, sugar, cooking oil and crude oil are important reasons for the increase.
Some experts think inflation will ease later, so they expect only a short and shallow series of hikes.
Another forecast places the rate increases later and warns that the RBI might need to raise rates more if inflation and excess money in the banking system remain difficult to manage.
Economists expect the Reserve Bank of India to raise its repo rate by 50 basis points, most commonly through 25-basis-point hikes in October and December.
Retail inflation rose to 4.82% in August from 4.45% in July, while food inflation reached 5.66%.
Inflation is projected to peak near or above the RBI’s 6% upper tolerance limit, with vegetable, sugar, edible-oil and fuel prices contributing to the increase.
Higher crude oil prices, possible El Niño effects, US rate increases, strong economic growth and abundant liquidity are influencing the rate outlook.
Most economists expect a shallow rate-hike cycle, although MUFG sees some risk of as much as 75 basis points in total increases.
- Who
- The Reserve Bank of India’s Monetary Policy Committee, with economists from HSBC, Nomura, SBI Research, IDFC First Bank and MUFG providing forecasts.
- What
- The RBI is widely expected to raise its repo rate by a total of 50 basis points, although economists differ over the timing and possible size of the increases.
- Where
- India.
- When
- Most forecasts point to the October and December monetary policy meetings; MUFG instead expects hikes in December 2026 and February 2027.
- Why
- Inflation is expected to approach or exceed the RBI’s 6% upper tolerance limit amid higher food and crude oil prices, possible adverse weather, strong growth and changing US-India interest-rate differentials.
Shallow and Gradual Hikes
Potentially Faster or Later Tightening
Timing of the first increase
Shallow and Gradual Hikes
HSBC, Nomura, SBI Research and IDFC First Bank generally favor beginning with a 25-basis-point hike in October, followed by another in December, though Nomura assigns a 40% chance of an October hold.
Potentially Faster or Later Tightening
MUFG expects the two 25-basis-point hikes in December 2026 and February 2027, rather than in October and December.
Total size of the rate cycle
Shallow and Gradual Hikes
Several economists expect a total increase of 50 basis points, or possibly 50–75 basis points, because inflation is expected to normalize rather than reflect broad-based price pressures.
Potentially Faster or Later Tightening
MUFG sees some risk that the RBI could eventually deliver 75 basis points of hikes if credit growth and abundant liquidity are not managed effectively.
Inflation outlook
Shallow and Gradual Hikes
Economists expect inflation to ease in the fourth quarter and describe the likely rate-increase cycle as shallow.
Potentially Faster or Later Tightening
SBI Research expects retail inflation could cross 6.5% before falling below 6%, while MUFG warns that adverse weather, elevated oil prices and liquidity conditions could create further risks.
Key facts
- August retail inflation
- 4.82%, up from 4.45% in July
- August food inflation
- 5.66%
- Projected inflation peak
- About 6.1% in the third quarter, with some forecasts above 6.5%
- Expected rate increase
- Most economists forecast two 25-basis-point hikes, totaling 50 basis points
- Projected repo rate
- 5.75% after the expected increases
- Main price pressures
- Vegetables, sugar, edible oils, fuel and crude oil
- Liquidity issue
- MUFG said excess liquidity linked to foreign-currency inflows exceeded INR 10 trillion
Quotes
HSBC economists
Economists at HSBC led by chief India economist Pranjul Bhandari.
“Time to build moats through a 25 bps hike in October and December monetary policy committee (MPC) meetings each, and then to pause and take stock with upcoming data.”
rediff.com
“We expect the RBI to hike policy rates by 25 bps each in the October and December policy meetings, taking the repo rate to 5.75 per cent.”
rediff.com
Sources
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