Indian Rupee: Stronger growth justifies extended RBI tightening – Societe Generale

Societe Generale's analysts now anticipate the Reserve Bank of India will implement three 25 basis point rate hikes, raising the repo rate to 6.00% by early 2027, compared to their previous forecast of two hikes. This revision stems from robust Indian GDP data and a more aggressive stance from the Federal Reserve, which lowers concerns about growth risks and increases worries about inflation and global stability.

The revised RBI policy-rate forecast now anticipates three 25bp hikes, increasing the repo rate from 5.25% to 6.00% by early 2027. This adjustment implies a reduced downside growth cost of further monetary tightening and indicates the economy is operating with less slack capacity than currently projected by the RBI for FY27, at 6.7%.

The higher activity level also heightens the likelihood that existing food, fuel, and input cost pressures will eventually contribute to core inflation. Given the stronger-than-expected growth, inflation risks have shifted upwards and global monetary conditions have become less supportive, suggesting a 50bp tightening cycle would be insufficient to maintain an appropriate real policy-rate buffer.

Consequently, the analysts now expect 75bp of cumulative RBI tightening, with most likely delivered through measured 25bp increments in successive meetings in October, December, and February, as evidence of persistent inflation and external pressure accumulates.