The Reserve Bank of India is widely expected to raise the repo rate by 25 basis points at its October 2026 Monetary Policy Committee meeting, taking the rate from 5.25 percent to 5.50 percent. According to policy experts and economists the probability of a 25-basis-point hike is around 75 percent, while the probability of a status-quo decision is around 23 percent. However, a larger 50-basis-point increase appears highly unlikely.
The RBI’s Monetary Policy Committee (MPC) meeting, which began today (5 October) and will conclude on Wednesday, will decide the central bank’s policy repo rate. The repo rate is the rate at which the RBI lends to commercial banks and serves as a key benchmark for interest rates across the banking system. Changes in the repo rate influence the lending rates offered by banks on various types of loans.
The case for a rate hike in October has strengthened considerably in recent months, driven by two key developments. Inflation has moved above the RBI’s medium-term target of 4 percent, with August consumer inflation reaching 4.82 percent. This is particularly important because inflation has remained above the target for several consecutive months. Although some of the increase is driven by factors outside the direct control of monetary policy, such as food and energy prices, the RBI has to consider the possibility that persistent inflation could gradually influence inflation expectations.
The sharp increase in crude oil prices is another major concern. Oil prices above 100 dollars a barrel create a difficult situation for India because the country is heavily dependent on imported crude. Higher oil prices increase the import bill, put pressure on the current account and can weaken the rupee. A weaker rupee, in turn, increases the domestic cost of imported commodities and creates an additional inflationary pressure. The combination of expensive crude and currency weakness is therefore considerably more uncomfortable for the RBI than either factor alone.
The rupee’s weakness has consequently become an important part of the monetary-policy debate. The RBI does not target a particular exchange rate, but it has a strong interest in avoiding disorderly currency depreciation because of its potential impact on imported inflation and financial stability. Higher domestic interest rates can help reduce some of the pressure by improving the relative attractiveness of rupee assets, although monetary policy cannot by itself determine the exchange rate.
At the same time, India’s economic growth remains strong. Real GDP growth of around 7.8 percent gives the RBI considerably more flexibility to focus on inflation than it would have if economic activity were weak. A moderate 25-basis-point increase is therefore unlikely to be viewed as a serious threat to overall economic growth. Strong domestic demand also reduces the risk that a modest rate increase would immediately cause a sharp slowdown.
Economists and financial institutions are, however, divided about what happens after October. The more conservative group, as they were quoted in reports, expects only a shallow tightening cycle of around 25 to 50 basis points. Their argument is that the current inflationary pressure is partly caused by commodity prices and geopolitical developments, which cannot be solved through higher interest rates. Core inflation also remains relatively contained, making aggressive monetary tightening potentially unnecessary.
A more aggressive group believes that the RBI may ultimately need to raise rates by 75 to 100 basis points if inflation remains elevated, crude oil prices stay high and the rupee remains under pressure. Their argument is that the RBI should act early rather than wait until inflation becomes deeply embedded in expectations. Strong economic growth gives the central bank sufficient room to tighten without causing a severe economic downturn.
But the majority believes that the most likely outcome is a 25-basis-point increase in October followed by another 25-basis-point increase later in the year, most probably in December, if inflation and crude prices remain elevated. That would take the repo rate to 5.75 percent by the end of 2026.
The probability of an October rate hike is higher than the probability of a further December hike because the December decision will depend heavily on incoming inflation data, crude oil prices, currency movements and global interest rates. If inflation begins to moderate and oil prices fall, the RBI could stop at 5.50 percent. Conversely, if oil remains above 100 dollars a barrel and inflation continues moving higher, the market could begin pricing a much more aggressive tightening cycle.
A decision to leave the repo rate unchanged at 5.25 percent is still a meaningful possibility. The RBI could argue that core inflation remains manageable, that commodity-related inflation may prove temporary and that previous monetary-policy actions have not yet had their full effect on the economy. A pause would also give the central bank more time to assess whether the recent rise in inflation is persistent or merely the result of temporary external shocks.
However, a hold would probably be viewed as the more dovish outcome by financial markets. Markets have increasingly moved toward expecting a 25-basis-point increase, so maintaining the existing rate could put additional pressure on the rupee and government bond yields. The RBI would therefore need to provide a convincing explanation for choosing to wait.
A 50-basis-point hike in October appears very unlikely. Such a move would represent a significant change in the RBI’s policy approach and would suggest that the central bank considers inflation risks substantially more dangerous than they currently appear. The present circumstances do not seem to justify such an aggressive move when core inflation remains relatively moderate and some of the inflation pressure originates from global commodity markets.
For investors, the most important issue may not be the actual 25-basis-point increase. A 25-basis-point hike is increasingly anticipated by the market and therefore may already be partly reflected in asset prices. The more important signal will come from the RBI’s assessment of future inflation, its updated economic projections and the language used to describe the policy stance.
If the RBI raises rates by 25 basis points but signals that the tightening cycle could continue, bond yields could move higher and interest-sensitive sectors could face additional pressure. Banks may initially benefit from higher lending rates, although the impact will depend on deposit costs, credit demand and the speed at which lending rates adjust. NBFCs and highly leveraged companies would generally face greater pressure from a sustained increase in borrowing costs.
If the RBI raises rates but adopts a cautious tone and indicates that further increases will depend on incoming data, markets could interpret the decision as the beginning of a limited tightening cycle rather than a major shift in monetary policy. This would probably be less disruptive for equities and bonds.
The most important risk to this assessment is crude oil. If oil prices decline significantly, inflation could moderate faster than expected and the RBI may stop after a single 25-basis-point increase. If oil prices remain exceptionally high for several months, the situation could change considerably. Persistent energy inflation combined with rupee weakness could force the RBI to tighten more aggressively than currently expected.
Overall, my base-case scenario is that the RBI raises the repo rate by 25 basis points to 5.50 percent in October 2026. I assign approximately a 75 percent probability to this outcome, around 23 percent to a hold at 5.25 percent and only about 2 percent to a 50-basis-point increase.
The market expectation for the end of 2026 is a repo rate of approximately 5.75 percent. However, the range of possible outcomes is wider than the October decision itself suggests. If inflation and crude oil prices remain elevated, the repo rate could eventually move toward 6 percent or higher. If inflation normalises and oil prices fall, 5.50 percent could become the terminal rate for this cycle, experts say.
