SBI Research, IDFC First expect rate hike in October as crude prices climb: Higher oil prices & inflation raise likelihood of policy tightening

Some economists have brought forward their forecasts for a rate hike by the central bank to as early as October, overturning earlier expectations that the rates would be held steady for the rest of the year amid surplus liquidity.

IDFC First Bank and SBI Research now expect a 25-basis-point (bps) increase next month due to a sharp rise in crude oil prices driven by escalating tensions in West Asia. Amitabh Chaudhry, chief executive of Axis Bank, has also cautioned that a rate hike may be needed sooner rather than later due to rising inflation risks.

The six-member Monetary Policy Committee of the Reserve Bank of India will meet from October 5 to 7 to review interest rates. The repo rate currently stands at 5.25%.


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Both IDFC First Bank and SBI Research said rising crude oil prices - now around $108 a barrel - persistent food inflation and resilient economic growth have increased the likelihood of policy tightening. Prolonged supply-side shocks risk feeding into broader inflationary pressures and inflation expectations, even as the RBI withdraws excess liquidity from the banking system, they said.

Axis Bank's Chaudhry had also flagged inflation risks posed by higher oil prices and a narrowing India-US interest-rate differential, saying a rate hike may be needed, on the sidelines of the Global Fintech Fest last week.

Until recently, most economists expected the RBI to maintain rates at current levels through at least the rest of the calendar year, supported by surplus liquidity and the central bank's relatively dovish tone at the August policy review.

"The rate hike cycle is expected to be shallow, with cumulative hikes of 50 bps to 75 bps, as it is driven by normalisation in inflation rather than signs of widespread price pressures," IDFC First Bank chief economist Gaura Sen Gupta said in a report released late on Sunday. "The rate hike cycle could start in October or December, with higher chances of an October start given that inflation will peak in Q3 FY27."

Soumya Kanti Ghosh, group chief economic adviser at SBI, said in a report: "Now we strongly advocate a 25-bps rate hike in the upcoming October policy (followed by another in December in quick succession)."

India's headline retail inflation rose to 4.82% in August from 4.45% in July, tracking around the RBI's 5% projection for FY27, with upside risks from food and fuel prices. Economic growth was estimated at 7.8% in the first quarter.

In the minutes of the August MPC meeting, RBI governor Sanjay Malhotra said the 5.25% repo rate had been set in an environment where inflation averaged around 2% in FY26, and that the subsequent rise in inflation warranted a reassessment of the policy setting.

SBI Research said crude prices had crossed $100 a barrel amid heightened geopolitical uncertainty and warned that inflation could rise further if input-cost pressures continue to spread across sectors. It added that if oil prices remain elevated, inflation in October and November could move towards 6.5% or higher.