RBI should hike rate by 25 bps in October to counter external shocks: Report
An SBI research report recommends the Reserve Bank of India raise interest rates. The central bank should implement a 25 basis point hike next month, it says. This action aims to counter external shocks and rising crude oil prices. Inflationary pressures are also showing signs of becoming more widespread. The report advocates for a second rate increase in December.
The Reserve Bank of India (RBI) should increase the benchmark interest rate by 25 basis points in October, according to an SBI research report. This move aims to counteract persistent external shocks, surging crude oil prices, and emerging signs of broader inflation. The Monetary Policy Committee (MPC) is scheduled to meet on October 5-7, 2026, with the rate hike set to be implemented in December as well.
In August, the central bank maintained the short-term lending rate (repo rate) at 5.25% for the fourth consecutive time. Although there was little expectation of a rate hike amidst speculation for a prolonged pause, the circumstances have significantly shifted. Recent concerns over geopolitical uncertainties have driven crude prices to exceed $100 per barrel, with forecasts predicting a potential rise to $123 per barrel within the next 15 days.
SBI Ecowrap, an Economic Research Department report, asserts that its recommendation for a rate increase is separate from any forthcoming actions by the US Federal Reserve. The report also projects that crude prices could reach $123 per barrel within 15 days, driven by heightened geopolitical uncertainties.
The SBI research team strongly advocates for a 25-basis point rate hike in the upcoming October policy, followed by another hike in December, considering the evolving undershoots. They note that the rate hike recommendation is independent of the August Consumer Price Index (CPI) inflation print, which may be around 4.8-4.9%. If oil prices remain high, the October and November inflation figures could surge to 6.5% or higher.
The report highlights that CPI-based retail inflation is displaying early signs of becoming more widespread. This broad-based inflation is particularly evident in sectors where input prices are rising faster than output prices, such as crude petroleum, natural gas, beverages, pharmaceuticals, and electronics. The pass-through effect has not been fully realized on the producer side, especially in these sectors.
With inflation becoming less concentrated and significant cost pressures yet to be fully transmitted, the report suggests that waiting for the complete pass-through to materialize in CPI could result in responding too late, once inflation has become more entrenched. A notable example is the sharp rise in restaurant inflation due to the increased prices of onions, edible oil, and liquefied petroleum gas (LPG).
In terms of liquidity, the report mentions that Foreign Currency (FCNR) (B) inflows have expanded banks' lendable resources while creating a surplus liquidity in the banking system. The USD 127 billion mobilized almost matches the fund gap in the banking system. This indicates that the current liquidity spike will have a natural drawdown once the anticipated credit demand is met, particularly given the strong Q1 FY27 GDP growth figures.
The RBI's Bank Lending Survey for Q1 2026-27 also indicates strong credit demand in the second half of FY27.
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