RBI May Raise Rates By 25 Basis Points In October, Economists Flag Rising Oil Prices And Inflation

India's central bank, the Reserve Bank of India (RBI), is expected to raise interest rates by 25 basis points in its October policy meeting, according to economists. The Monetary Policy Committee will convene from October 5 to 7 to determine the benchmark repo rate.

Higher oil prices and a surge in inflation have bolstered the argument for the RBI to act sooner rather than later. Bank of America recently forecasted a 25 basis point increase for October, pointing to the impact of rising energy costs, food inflation, and overall price pressures.

SBI Research also supports the 25 basis point hike, citing spreading inflation, worsening global conditions, shifting liquidity, and a fresh evaluation of risks across markets. The report emphasizes that an early move would be prudent in the face of geopolitical tensions and uncertainty over crude prices.

Inflation has recently climbed to 4.82 percent in August, up from 4.45 percent in July, putting additional pressure on policymakers. Additionally, strong El Niño conditions and the prospect of below-normal rainfall in October could create further risks for the winter crop.

Rising crude prices and increasing global bond yields have also diminished the RBI's ability to maintain unchanged rates. BNP Paribas India noted that the country's economic outlook has weakened in recent weeks, with Brent crude surpassing $100 a barrel and US Treasury yields approaching 5 percent.

While Nomura expects limited increases, they anticipate the RBI to cap hikes at 25-50 basis points during this cycle. Analysts believe that markets are anticipating a more substantial tightening than current conditions warrant, assigning an 80% probability to a limited policy adjustment rather than a broader cycle involving rate increases exceeding 75 basis points. Ultimately, the final decision rests with the Monetary Policy Committee.