RBI may hike repo rate by 25 bps on October 7 as inflation pressures mount

The Reserve Bank of India is likely to raise the repo rate by 25 basis points in its October monetary policy review as rising inflation, elevated crude oil prices and monetary tightening by major global central banks increase pressure on the central bank to reverse its recent policy direction.

A majority of the 16 economists and bankers surveyed in a PTI poll expect the Monetary Policy Committee (MPC) to increase the policy repo rate from the current 5.25% to 5.50% when it announces its decision on Wednesday. Most respondents also expect the RBI to accompany the move with a hawkish policy tone.

First hike since 2023

A rate increase would be the RBI’s first since February 2023, when the repo rate was raised by 25 basis points to 6.50%. The central bank subsequently held rates before embarking on a rate-cutting cycle in 2025.

After the cuts, the RBI has kept the repo rate unchanged at 5.25% in its last four policy reviews. The October meeting could therefore mark a significant shift from accommodation towards monetary tightening.

“Coordination with global central bank hikes, rising inflation risks and strong growth momentum provide policy space to hike,” Kanika Pasricha, chief economic advisor at Union Bank of India, said.

Dipti Deshpande, principal economist at Crisil, said inflationary pressures had intensified since the previous policy review, primarily because of the renewed West Asia conflict and its impact on energy and commodity prices.

Inflation gathers pace

Retail inflation accelerated to an eight-month high of 4.82% in August from 4.45% in July. Inflation has now remained above the RBI’s 4% medium-term target for three consecutive months.

CPI inflation increased from 3.93% in May to 4.38% in June and 4.45% in July before climbing further in August. The August reading was also the highest recorded under the new CPI series, which uses 2024 as its base year.

There are signs that price pressures are becoming more broad-based. Rajani Sinha, chief economist at CareEdge Ratings, said around 19% of the 358 items in the CPI basket recorded inflation above 6% in August, compared with 13% in March.

Crude adds pressure

The surge in crude oil prices to above $100 a barrel has emerged as one of the biggest risks to the inflation outlook, particularly because India imports most of its crude oil requirements.

Aditi Nayar, chief economist and head of research and outreach at ICRA, said elevated crude prices could eventually result in an increase in retail petrol and diesel prices and contribute to a broader rise in prices.

Economists consequently expect the RBI to revise its FY27 inflation forecast upwards.

In its August policy, the central bank projected CPI inflation at 5% for FY27. It forecast inflation at 4.7% in the second quarter, 5.9% in the third and 5.5% in the fourth quarter, with Q1 FY28 inflation projected at 5.3%.

Apoorva Javadekar, chief economist at Shriram Group, expects the RBI to raise its inflation forecasts for the third and fourth quarters by around 10 basis points.

Not everyone expects hike

While a majority of economists expect the MPC to raise rates, there is no unanimity.

Sachchidanand Shukla, group chief economist at Larsen & Toubro, expects the RBI to maintain the status quo. He argued that the central bank could wait for clearer evidence before tightening monetary policy because there were no significant signs yet of demand-led inflation or overheating in the economy.

The debate within the MPC is therefore likely to centre on whether current inflation pressures are sufficiently persistent and broad-based to warrant an immediate rate increase or whether policymakers should wait for additional data.

Experts are also divided over the formal policy stance, with views ranging from maintaining the existing position to “calibrated tightening” or a “withdrawal of accommodation”.

More hikes possible

Several economists expect October, if the RBI acts, to mark the beginning of a relatively gradual tightening cycle rather than a one-off increase.

Experts surveyed by PTI broadly expect at least two rate increases during FY27, with several forecasting two to three hikes during the financial year.

Gaura Sengupta, economist at IDFC First Bank, said gradual policy normalisation had become necessary as headline inflation increased. A rate hike, she said, would also help prevent real interest rates from turning negative in the coming quarters.

Higher policy rates would eventually feed into borrowing costs across the economy, potentially affecting home, vehicle, personal and business loans, although the timing and extent of transmission would vary across lenders and loan structures.

Growth forecast may rise

The RBI faces the challenge of controlling inflation without unnecessarily weakening economic activity at a time when growth has remained stronger than previously anticipated.

Economists largely expect the central bank to revise its FY27 GDP growth projection upwards, although some believe the existing forecast could be retained.

Radhika Rao, senior economist and executive director at DBS Bank, expects a slight upward revision to above 7%.

The RBI had projected real GDP growth of 6.7% for FY27 in its August monetary policy, with quarterly growth estimated at 7% in Q1, 6.4% in Q2, 6.5% in Q3 and 6.8% in Q4. Q1 FY28 growth was projected at 7.3%.

Strong economic activity gives the central bank greater room to prioritise inflation control because a modest increase in borrowing costs may be easier for the economy to absorb when growth remains resilient.

Liquidity in focus

Along with the repo rate and inflation projections, financial markets will closely watch the RBI’s approach to liquidity.

Economists expect the central bank to continue using instruments such as variable rate reverse repo operations, open market operations and foreign exchange swaps to manage surplus liquidity in the banking system.

The October 7 decision will ultimately signal whether the RBI believes the inflation shock requires an immediate monetary response. A 25-basis-point increase would represent a clear change in direction after the 2025 easing cycle and place inflation control firmly back at the centre of monetary policy.