RBI rate hikes may extend into 2027 as inflation risks broaden

The Reserve Bank of India is increasingly expected to raise interest rates again in December and potentially continue tightening into 2027 as broadening inflationary pressures force it deeper into a global rate-hike cycle.

The growing expectation comes after the central bank on Wednesday raised its benchmark repo rate by 25 basis points to 5.5%, its first increase in nearly four years, and shifted its policy stance from “neutral” to “calibrated tightening”. The next Monetary Policy Committee meeting is scheduled for December 2 to 4, with the policy decision due on December 4.

Economists at Goldman Sachs, Standard Chartered, Deutsche Bank and Morgan Stanley are among those forecasting another 25-basis-point increase at the December meeting. Some expect a further 50 basis points of tightening in the first half of 2027, which would take the repo rate to 6.25%, a two-year high.

Inflation outlook turns more challenging

The RBI's decision reflects growing concern that price pressures are no longer confined to a few categories.

Consumer inflation rose to 4.8% in August from 4.5% in July, while core inflation increased to 4.2%. The RBI said the share of items in the consumer price index recording inflation above 4% had steadily increased to about 37% in August.

The central bank has raised its inflation forecast for 2026-27 to 5.2%, from its earlier projection of 5%, with inflation expected at 6% in the third quarter and 5.7% in the fourth quarter. It also projected core inflation at 4.4% for the financial year.

More recent estimates suggest the pressure may intensify. A Reuters poll of 41 economists expects September consumer inflation to rise to 5.4%, driven by higher food and energy costs. Brent crude has also moved above $100 a barrel amid tensions in the Middle East.

Goldman sees at least 75 basis points more

Santanu Sengupta of Goldman Sachs said the investment bank's measure of the RBI's policy tone showed a “material increase in the hawkishness” of its communication compared with August.

He expects at least another 75 basis points of rate increases, citing resilient economic growth, increasingly broad-based price pressures and the possibility that El Niño-related food inflation risks will intensify in 2027.

Morgan Stanley's chief India economist Upasana Chachra also expects further increases.

“The broadening of inflationary pressures alongside healthy growth momentum as reflected in credit growth warrants further rate hikes,” she said, adding that higher rates would help normalise real rates, contain second-round inflation risks, preserve inflation expectations and support external stability.

Citigroup's Samiran Chakraborty has similarly increased the probability he assigns to 75 basis points of tightening.

Oil, monsoon and rupee add to risks

The inflation outlook is being complicated by several external and domestic risks.

The conflict in the Middle East has pushed up energy costs, while weak monsoon conditions and El Niño threaten to put further pressure on food prices. The rupee, meanwhile, has been trading close to a record low. It slipped to around 96.76 against the US dollar in the aftermath of the RBI's decision, with analysts warning that further weakness could add to imported inflation.

India is the world's third-largest oil importer, making the economy particularly vulnerable to a prolonged rise in crude prices.

The RBI's latest projections also point to continuing supply-side pressures from deficient monsoon conditions, El Niño and elevated energy and commodity prices.

Household surveys released by the central bank on Wednesday added to the concern, showing that consumers expect inflation to accelerate sharply in the coming months.

Growth gives RBI room to tighten

The central bank has some room to focus on inflation because economic growth remains strong.

India's economy expanded 7.8% in the April-June quarter, exceeding the RBI's earlier forecast. The central bank has also raised its full-year 2026-27 growth forecast by 40 basis points to 7.1%.

The RBI said there were only limited signs of demand-side inflationary pressures, but warned that strong growth in monetary and credit aggregates posed risks.

The combination of robust growth and widening price pressures has therefore made additional rate increases easier to contemplate without immediately risking a sharp slowdown.

Malhotra keeps the door open

Governor Sanjay Malhotra has nevertheless stressed that the RBI has not committed itself to a predetermined series of hikes.

He described “calibrated tightening” as a milder form of tightening and said the duration and extent of the rate-hike cycle would depend on how inflation and growth evolve.

The RBI's formal explanation of the new stance was that rate cuts are off the table in the near term, while future policy action could be either a hike or a pause depending on economic conditions. The central bank specifically said the path would depend on underlying inflation, the broadening of price pressures, second-round effects from supply shocks and demand conditions.

Malhotra also played down concerns about the rupee's current level. He said the currency may be undervalued but noted that “markets can be quite irrational in the short run”. He reiterated that the RBI's objective is to contain excessive volatility rather than target a particular exchange rate.

Economists divided over the pace

Not all economists expect a prolonged tightening cycle.

HSBC's Pranjul Bhandari expects another increase in December but cautioned against interpreting the change in stance as a commitment to a particular number of hikes.

“The RBI hasn't signed up for a specific quantum of hikes; it can hike or stay on hold in every meeting,” she said, pointing to the central bank's experience in 2018.

The RBI adopted “calibrated tightening” in October that year after raising rates twice, but did not increase them again before eventually reversing course.

Barclays' Aastha Gudwani and economists at ICRA also do not expect sharp increases after December. Gudwani expects only one more 25-basis-point increase during the remainder of 2026-27, although she believes it may come in February rather than December.

Capital Economics, meanwhile, expects 25-basis-point hikes in both December and February, which would take the repo rate to 6%, above the current consensus terminal-rate forecast of 5.75%.

The divergence reflects uncertainty over whether the recent inflation shock will persist or ease. For now, however, the RBI's policy shift has made one point clear: the era of near-term rate cuts has ended, and further tightening remains firmly on the table.