Two more interest rate hikes on cards

India's repo rate may rise to 6.25% in response to persistent motor-fuel prices, with analysts predicting a series of quarter-percent hikes over the next two reviews and possibly another in April during the current tightening cycle, as concerns about inflation persist. The Reserve Bank of India (RBI) raised the repo rate for the first time in four years by 25 basis points to 5.50% in October, following the release of minutes from the October meeting, which indicated growing worries about broadening inflation risks.

Market participants and economists now anticipate a 25-basis-point increase in December and February reviews, with a further 25-basis-point hike in April possible if crude oil prices stay above $100.

Following the minutes release, the probability of a consecutive hike in December has increased, according to Barclays. The bank's terminal rate forecast for this hiking cycle is now at 6%, and they expect the cycle to be shallow. The RBI had projected crude oil prices at $95 per barrel for the second half of fiscal year 2027, but actual prices have risen to $105-110.

The increase in crude oil prices exacerbates inflation concerns, as India is a net importer of the commodity. While some believe prices may ease due to base effects, others anticipate softer retail inflation in fiscal year 2028 and limited second-round price effects, potentially limiting the need for further tightening. Barclays expects core CPI to be at 4.2%, lower than the Monetary Policy Committee's forecast of 4.4%, suggesting that second-round price effects or demand-side price pressures remain relatively contained.