The question of whether the Reserve Bank of India (RBI) will increase its benchmark repo rate in October is a central point of discussion among economists and financial analysts. This comes as several major central banks globally have already moved to tighten monetary policy in response to persistent inflation.
Global Central Banks Hike Rates
Recent weeks have seen significant rate adjustments by international financial institutions. The US Federal Reserve, for instance, raised its interest rates by 0.25% to a range of 3.75-4.0% in mid-September, citing high inflation. This marked its first rate hike in three years. Similarly, Japan's central bank increased its main interest rate to 1.25%, a level not seen since 1995, while the European Central Bank also implemented a quarter-percentage-point hike a week prior.
Although the Bank of England kept rates unchanged, it signaled potential increases if the US-Iran conflict continues to drive up energy prices, further fueling global inflation.
Domestic Inflationary Pressures and Economic Strength
In India, inflationary trends are a growing concern. The Consumer Price Index (CPI) inflation rose to 4.82% in August from 4.45% in July, with food inflation climbing to 5.95%. Wholesale inflation also surged to 9.92% in August. The resurgence of crude oil prices above $100 per barrel adds pressure to India's import bill, given the country's reliance on oil imports. A weak monsoon could also impact farm prices and the broader rural economy.
Despite these inflationary pressures, India's GDP growth remains robust, expanding by a better-than-expected 7.8% in the April-June quarter, potentially strengthening the case for a repo rate hike.
Economists Divided on RBI's Next Move
Several leading economists anticipate an RBI interest rate hike. Pranjul Bhandari, chief India economist at HSBC, expects two 25 basis points (0.25%) rate hikes in the October and December monetary policy committee meetings. Bhandari believes that acting early signals a proactive response to prospective inflation, enhancing credibility and anchoring expectations.
Prateek Ancha, chief economist at Axis Capital, also foresees rate hikes in October and December, suggesting the Fed's recent move has complicated policy calculations and could even lead to a third hike depending on incoming data. Murthy Nagarajan, head of fixed income at Tata Asset Management, highlighted hawkish minutes from the previous MPC meeting and expects multiple hikes to take the repo rate to 6% by March 2027, given strong GDP and inflation expectations.
Madhavi Arora, lead economist at Emkay Global Financial Services, similarly predicts a 25 bps hike in October, citing rising energy prices, firm GDP growth, and an upside surprise in August's core CPI inflation as tipping points.
Arguments for Holding Rates
Conversely, some institutions suggest the RBI might maintain current policy rates in October. India Ratings and Research points to a unique situation of liquidity surplus alongside increasing inflation. They emphasize that the banking system's liquidity condition will be a key indicator for the RBI's next monetary policy action.
Vikram Chhabra, senior economist at 360 ONE Asset, believes the RBI may first focus on absorbing excess liquidity through additional open market operations (OMOs) and forex sell-buy swaps. However, he acknowledges that if inflationary pressures persist, the odds of an RBI interest rate hike by the fourth quarter of FY27 would increase.