Indian consumers and businesses should prepare for higher borrowing costs as market experts anticipate several interest rate hikes by the Reserve Bank of India (RBI) this financial year. This shift follows a period in 2025 where the RBI's Monetary Policy Committee (MPC) reduced the benchmark repo rate, offering relief to borrowers, particularly those with home loans tied to external benchmarks.
However, the economic outlook for 2026 has changed significantly. The primary drivers for these expected rate increases are persistent geopolitical tensions, particularly the ongoing conflict in West Asia, which has led to a surge in crude oil prices, and domestic inflationary pressures compounded by a weakening rupee.
Why Interest Rates Are Rising
Elevated Energy Prices and Global Conflict
The conflict in West Asia has disrupted global oil supplies, pushing crude oil prices upwards, with benchmarks recently holding around $109 a barrel. India, heavily reliant on oil imports, has already seen petrol and diesel prices increase nationwide. This rise in fuel costs is expected to have a ripple effect across the economy, increasing public transport fares, freight costs, and raw material expenses for companies, which are likely to pass these on to consumers.
Mounting Inflationary Pressures
Even before the recent fuel price hikes, wholesale inflation surged to 8.3 percent in April, marking a 3.5-year high. Retail inflation is also projected to rise in the coming months. Adding to these concerns, the looming El Nino weather conditions threaten to impact the monsoon season, potentially leading to deficient rains and soaring temperatures. This could significantly push up food prices, further exacerbating inflationary pressures across the country.
Depreciating Rupee
The Indian rupee has been under continuous pressure against the US dollar, largely due to geopolitical uncertainties and substantial equity market selling by foreign investors. The rupee recently hit a record closing low of 96.35 against the dollar. A depreciating currency makes imports more expensive, contributing further to inflation and making it difficult for the RBI to maintain a stable monetary policy without intervention.
Expert Forecasts on Rate Hikes
Financial experts are largely in agreement that the RBI will be compelled to raise rates. While the MPC might opt for a 'wait and watch' approach in its upcoming June meeting, subsequent policy reviews are expected to see rate actions.
- Devang Shah, Head – Fixed Income at Axis Mutual Fund, anticipates around 75 basis points (bps) of rate hikes during the current financial year. He projects the repo rate could move closer to 6 percent by March 2027 from its current 5.25 percent. Shah emphasized that failure to hike rates would put the currency under severe pressure and make the current rate untenable if CPI inflation rises to 5.5 percent.
- Seshadri Sen, Head of Research and Strategist at Emkay Global Financial Services, outlined two scenarios: a 25 bps hike if the energy crisis subsides, or as much as 100 bps if it persists.
- Dhananjay Sinha, Co-Head of Institutional Equities at Systematix, warned that recent fuel price adjustments were just the beginning of a series of hikes. He sees wholesale price index (WPI) inflation potentially crossing 10 percent if crude oil remains above $100 per barrel, forcing the central bank to reverse its accommodative stance.
- Puneet Pal, Head of Fixed Income at PGIM India Mutual Fund, expects the RBI to raise policy rates by 50-75 bps by the end of December 2026, noting that bond markets are already factoring in such increases.
These projections underscore a challenging period ahead for borrowers, as the RBI navigates a complex economic environment marked by global instability and domestic inflationary pressures.