The Reserve Bank of India (RBI) could be on the verge of reversing its recent rate-cutting cycle, with economists and bankers increasingly expecting a 25-basis-point repo rate hike in the October monetary policy review. The shift in expectations comes as inflationary pressures have intensified, particularly with the renewed escalation of the West Asia conflict pushing energy and commodity prices higher. Global monetary policy is also turning less accommodative as several central banks have raised interest rates.
A PTI poll of 16 economists and bankers showed that a majority expect the RBI to raise the repo rate and adopt a hawkish tone at the upcoming policy review. However, views remain split on whether the Monetary Policy Committee (MPC) will also change its policy stance.
A 0.25 percentage point increase would take the RBI’s repo rate above its current level of 5.25 per cent. Such a move would mark a significant departure from the easing cycle that began in 2025.
The central bank’s last repo rate hike came in February 2023, when the policy rate was raised by 25 basis points to 6.50 per cent. The RBI subsequently maintained the rate through 2023-24 before shifting towards rate cuts in 2025.
“Coordination with global central bank hikes, rising inflation risks and strong growth momentum provide policy space to hike,” said Kanika Pasricha, chief economic advisor at Union Bank of India, the report states.
Dipti Deshpande, principal economist at Crisil, said inflation risks have increased since the previous policy meeting, largely because of the renewed West Asia conflict and its impact on energy and commodity prices. According to her assessment, continued pressure on these fronts could result in additional rate increases.
Oil Prices Emerge As Key Inflation Risk
Crude oil has emerged as one of the biggest factors influencing expectations for the October policy. A sustained increase in global oil prices could feed into domestic fuel prices and subsequently widen inflationary pressures across the economy.
“The recent surge in crude oil prices to above USD 100/barrel could likely lead to an increase in the retail selling price (RSP) of petrol and diesel, and further generalisation of price pressures, which would necessitate an upward revision in the CPI inflation forecasts,” said Aditi Nayar, chief economist, head – research and outreach at ICRA.
Apoorva Javadekar, chief economist at Shriram Group, expects inflation projections for the third and fourth quarters of FY27 to be raised by 0.10 per cent. “In fact, the upward revision to future inflation is almost a pre-condition for a rate hike, as otherwise the inflation is progressing on the projected path.”
Retail Inflation Moves Above RBI Target
India’s retail inflation rose to an eight-month high of 4.82 per cent in August, compared with 4.45 per cent in July. CPI inflation has remained above the RBI’s 4 per cent target for three consecutive months.
Inflation increased from 3.93 per cent in May to 4.38 per cent in June and 4.45 per cent in July. The August reading was the highest recorded under the latest CPI series, which has 2024 as its base year.
Rajani Sinha, chief economist at Careedge Ratings, pointed to a widening spread of price pressures, with “around 19 per cent of the 358 items in the CPI basket” registering inflation above 6 per cent in August, compared with 13 per cent in March.
At its August monetary policy meeting, the RBI had projected FY27 CPI inflation at 5.0 per cent. Its quarterly projections stood at 4.7 per cent for Q2, 5.9 per cent for Q3 and 5.5 per cent for Q4. Inflation for Q1 of FY28 was projected at 5.3 per cent, while core inflation for FY27 was estimated at 4.3 per cent.
Economists Divided On Policy Stance
While expectations of a rate hike are gaining ground, economists do not have a common view on the RBI’s policy stance. Opinions are split between maintaining the existing stance and moving towards calibrated tightening, while some economists favour a withdrawal of accommodation.
A majority, however, expect the central bank’s communication to turn hawkish as it weighs domestic inflation risks alongside changes in global monetary policy.
Gaura Sengupta, economist at IDFC First Bank, said, “Gradual normalisation of policy as headline inflation is higher. The rate hike is needed to ensure real rates are not negative in the coming quarters.”
The debate over rates could also extend beyond the October meeting. Experts broadly expect at least two rate increases during FY27, while some see the possibility of two to three hikes during the financial year.
Sachchidanand Shukla, group chief economist at Larsen & Toubro, is among those who expect the RBI to retain the status quo. He believes the central bank may wait before tightening policy because there is currently no clear evidence of demand-driven inflation or overheating.
Growth Outlook Could Get An Upgrade
Despite concerns around inflation, economists remain relatively positive about India’s growth trajectory. Stronger-than-expected economic activity during the first half of FY27 could prompt the RBI to raise its GDP growth projection.
Radhika Rao, Senior Economist and Executive Director at DBS Bank, expects a “slight upward revision to above 7 per cent growth”.
The RBI’s August projection had pegged real GDP growth for FY27 at 6.7 per cent. The central bank had estimated quarterly growth at 7.0 per cent in Q1, 6.4 per cent in Q2, 6.5 per cent in Q3 and 6.8 per cent in Q4. Growth for Q1 FY28 was projected at 7.3 per cent.
Apart from interest rates and inflation forecasts, liquidity conditions are likely to remain an important part of the RBI’s policy framework.
Economists expect the central bank to continue deploying tools such as variable rate reverse repo (VRRR) operations, open market operations (OMOs) and foreign exchange swap operations to manage surplus liquidity in the banking system.
(With Agency Inputs)
