Rising inflation risks amid the threat of drought, a sharp rise in global bond yields, major central banks turning hawkish and continued pressure on the rupee, which is nearing 97 to the dollar, have strengthened expectations that the RBI may begin its rate hike cycle this Wednesday. Most economists expect a 25-basis-point increase in the repo rate, with another hike likely in December, taking the terminal rate to around 5.75%.
The Monetary Policy Committee (MPC) began its 63rd meeting on Monday and will announce its decision on Wednesday, as the RBI enters the 11th year of the MPC regime.
Projecting consumer price inflation to cross 6.5% in October-November, Soumya Kanti Ghosh, chief economic adviser at State Bank of India, expects the MPC to raise the repo rate by at least 25 bps this week. This could mean either a 50-bps hike in October or two 25-bps hikes before the end of the year.
“We believe the balance of risks has tilted decisively towards a 25-bps rate hike at this juncture as a combination of broadening inflationary pressures, worsening global macros, evolving liquidity conditions and a renewed global re-pricing of risks is making the case for pre-emptive action stronger,” Ghosh said.
Prateek Ancha, chief economist at Axis Capital, also expects 50 bps of tightening before the end of the year, through 25-bps hikes in October and December. He sees a possibility of another hike in February, taking the terminal rate to 6%, citing risks from a more hawkish global policy environment.
Economists at CareEdge, Rajani Sinha and Sarbartho Mukherjee, expect a 25-bps hike this week, while the stance is likely to remain neutral to retain policy flexibility. They expect the hiking cycle to remain shallow, with cumulative rate increases of 50-75 bps.
For Aditi Nayar, chief economist at ICRA Ratings, the base case is for a rate hike in December. However, if crude prices remain elevated and there is evidence of inflationary pressures broadening, the hike could be brought forward to October.
Madhavi Arora, chief economist at Emkay Global, said recent domestic and global developments have increased the likelihood of a rate hike in October, which would also bring the RBI's rate and liquidity stances into closer alignment.
“Domestic and global developments raise RBI rate hike odds in October,” she said, without quantifying the expected increase.
However, Sakshi Gupta and Deepthi Mathew, economists at HDFC Bank, expect the MPC to remain in wait-and-watch mode, although they expect the tone to turn more hawkish.
“With CPI inflation expected to inch up towards the upper band in Q3FY27, we expect RBI to start rate hiking from December onwards and we continue to expect the RBI to remain in wait and watch mode in the October policy, although expect the tone to be hawkish,” they said.
Similarly, Alexandra Hermann Prasad, lead economist at Oxford Economics, expects the RBI to hold the repo rate at 5.25% this week. “Though price pressures are broadening, core inflation has remained benign, allowing the RBI to support growth momentum for longer,” she said.
However, she expects the RBI to raise rates by 25 bps each in December and February.