RBI seen starting rate-hike cycle, repo could rise to 6% by FY27-end: Reports
The Reserve Bank of India is likely to increase the repo rate to combat rising inflation and support stronger growth. Reports indicate that a rate-hike cycle of 75 basis points is anticipated, potentially reaching 6 percent by FY27. While inflation drives this tightening, geopolitical factors could impact the extent of rate increases. ICICI Bank has raised its CPI inflation forecast based on core…
Reports suggest that the Reserve Bank of India may commence a rate-hike cycle, potentially pushing the repo rate to 6% by the end of FY27, as rising inflation, higher global yields, and robust domestic growth bolster the case for tighter monetary policy. Research from Union Bank of India and ICICI Bank aligns on a potential 75-basis-point tightening cycle, though they differ in policy stance and the factors that might influence the pace of rate increases.
Union Bank anticipates the Monetary Policy Committee (MPC) to increase the repo rate by 25 basis points to 5.50% in the latest review, with a gradual tightening approach. They project the October MPC to initiate a rate-hike cycle, with a baseline of 75 basis points and the repo rate reaching 6% by the end of FY27. ICICI Bank also supports a 75-basis-point cycle as the base case, maintaining that real interest rates would remain within the 1.4-1.9% range.
However, the bank favors a data-dependent stance with a neutral policy if global uncertainties persist, potentially limiting the cycle to 50 basis points if global energy prices drop sharply.
Inflation is identified as the primary driver for the expected tightening measures. ICICI Bank has raised its FY27 CPI inflation forecast to 5.1% from 5%, highlighting that inflation is becoming more widespread, with core inflation also on the rise. The bank expects CPI inflation to peak at around 5.9% in the third quarter of FY27.
Union Bank maintains a more aggressive inflation outlook, projecting FY27 CPI inflation around 5.4% and anticipating inflation to stay above 6% during parts of the second half of FY27. Deficient monsoon conditions and crude prices hovering around USD 100 per barrel are contributing to inflationary pressures.
Liquidity management is also a key area of focus. ICICI Bank notes that domestic and external developments warrant policy tightening, emphasizing that core liquidity has surged following foreign-currency inflows and that additional absorption is required. The bank expects the RBI to continue employing a mix of open market and foreign-exchange operations.
The size of the rate cycle will hinge on oil prices, global monetary policy, and monsoon conditions. Union Bank estimates that easing geopolitical tensions could confine tightening to 50-75 basis points, while a prolonged oil shock could extend the cycle to 100-125 basis points.
Written by urgent.news from The Economic Times - Economy's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
