India's retail inflation is set to rise sharply in the coming months, potentially crossing 6.5% before easing below 6% in early 2027, according to a recent report by SBI Research. This outlook has led analysts to anticipate two 25-basis-point repo rate hikes by the Reserve Bank of India (RBI) in October and December, followed by a pause.
Rising Price Pressures Across the Economy
The report highlights growing inflationary concerns, noting that retail inflation climbed to 4.82% in August, up from 4.45% in July. This increase was primarily driven by higher food prices, including essentials like onions. Wholesale price-based inflation also saw an uptick, reaching 9.92% in August from 9.78% in July, signaling persistent price pressures across various economic sectors.
Further analysis reveals a widening scope of inflation. Rural inflation stood higher at 5.23% compared to 4.31% in urban areas. Food inflation surged to 5.66%, while core inflation rose to 4.16% from 3.87% in July. SBI Research's data indicates that the process of inflation becoming generalized has begun, with 51 commodities contributing to 90% of the Consumer Price Index (CPI)'s weighted contribution in August, a significant rise from 22 commodities in January 2026.
Key Factors Driving Inflationary Outlook
Several factors underpin SBI Research's expectation of repo rate hikes:
- Broad-Based Inflation: The increasing number of commodities contributing to inflation suggests a more entrenched and widespread price pressure that may require a pre-emptive monetary policy response.
- Crude Oil Prices: The outlook for crude oil remains a significant concern, with prices expected to stay above $100 a barrel in the near term amidst volatility. The Indian crude basket has seen a sharp rise, from $82.04 a barrel in July to $109.76 in September.
- Imported Inflation: Imported inflation rose by 7.75% year-on-year in August, significantly higher than the headline CPI inflation. While the pass-through from higher crude prices to retail prices is currently partial, its broader impact can spread through various economic channels.
- Bond Yields: Rising global borrowing costs are adding pressure. India's benchmark 10-year yield, already around 7.10%, could potentially move towards 7.50% if supply-side shocks and energy-security concerns worsen.
RBI's Delicate Balance
For the RBI, the situation presents a delicate balancing act: addressing the risk of inflation becoming entrenched while managing the broader impact of higher interest rates and borrowing costs. SBI Research's recommendation for two 25-basis-point hikes would likely be followed by a pause, allowing the central bank to assess how inflation and other incoming economic data evolve.