The Reserve Bank of India’s Monetary Policy Committee (MPC) may raise the repo rate by 25 basis points this week as elevated crude oil prices, rising food prices and resilient economic growth increase inflationary risks, believe 80% of economists polled by FE.
The six-member MPC will meet from October 5-7, with the policy decision due on October 7. A 25-bps hike would take the repo rate to 5.50% from 5.25%. While most economists and research houses surveyed expect a hike, view differ on how far the tightening cycle could extend and whether the RBI will retain its “neutral” stance. Around 60% are betting on a neutral stance while others point at various other options, including calibrated tightening.
“The RBI’s Q3 inflation projection of 5.9% is likely to be surpassed, especially amid elevated oil prices, strengthening the case for a rate hike,” said Madhavankutty G, chief economist at Canara Bank. He expects a 25-bps hike while retaining the neutral stance.
Indranil Pan, chief economist at YES Bank, also expects a 25-bps increase, putting the probability of a delay at just 10-15%. However, he said the prevailing liquidity surplus raises questions over how effectively a rate hike would transmit through the economy.
Retail inflation rose to 4.8% in August from 4.45% in July and economists expect it to climb further in the coming months. Elevated crude oil prices and El Niño-related pressures on food prices have added to concerns over the inflation trajectory.
At the same time, GDP expanded 7.8% in the April-June quarter, exceeding the RBI’s earlier projection and giving the central bank greater room to respond to inflation risks.
Barclays, Nomura and Goldman Sachs expect the MPC to raise rates by 25 bps each in October and December.
Nomura sees the hikes as a pre-emptive recalibration rather than the start of an aggressive tightening cycle. It expects inflation to rise to 6.3% in the October-December quarter before moderating, with the repo rate peaking at 5.75%. It expects the neutral stance to be retained.
Barclays also sees the terminal repo rate at 5.75%, but expects the RBI to continue absorbing excess liquidity to improve monetary policy transmission. It expects the central bank to use a mix of variable rate reverse repo auctions, open market operation sales and swaps.
Goldman Sachs expects a longer tightening cycle. In addition to 25-bps hikes in October and December, it expects another 50 bps of tightening in the first half of 2027, taking cumulative hikes in the cycle to 100 bps. It cited stronger growth, broadening inflation pressures and tighter global monetary conditions for bringing forward its rate-hike call.
However, not everyone expects the RBI to move in October.
Madan Sabnavis, chief economist at Bank of Baroda, expects the MPC to keep both the repo rate and stance unchanged. “Raising rates while inflation is still at 4.8% — even though we expect it to cross 6% soon — may be premature, especially just before the busy festival season,” Sabnavis said. He also argued that the recent FCNR measures and surplus liquidity could weaken the transmission of a rate hike.
HDFC Bank also expects the repo rate to remain unchanged, but sees the possibility of the stance shifting towards tightening. It expects the RBI to raise its FY27 GDP growth forecast to 7% from 6.7%, while leaving its inflation projection unchanged.
Growth projections will be another key focus of the policy. Pan expects the RBI to raise its growth forecast by 20-30 bps to around 7%, while SBI Research expects a 30-bps upward revision in growth and a 20-bps increase in the FY27 inflation forecast.
Source: The Financial Express
