RBI likely to hike repo rate by 25 bps to 5.50% in October policy: ET Poll

The Reserve Bank of India’s Monetary Policy Committee (MPC) is likely to increase the key interest rate by 25 basis points to 5.50% in the October policy amid inflationary pressures due to rising oil prices because of the West Asia conflict and farm output taking a hit on account of the patchy monsoon, according to a poll of economists conducted by ET.

The rate-setting committee will begin its meeting on Monday and announce its decisions on October 7.

Out of the 21 economists and bank executives that ET polled, 20 expect the RBI to hike rates, a reversal of their expectations ahead of the previous MPC meeting on August 3-5. One expects the rate to remain unchanged, as it has been since December last year, when the central bank cut the rate by 25 bps to 5.25%.

Persistent high crude oil prices above $100 per barrel have heightened inflation concerns, while the US Federal Reserve’s rate hike last month will make it increasingly difficult for the Indian central bank to maintain the status quo, economists said.

Also Read: RBI may hike repo rate by 25 bps as inflation and oil risks mount: Sunil Sanghai

“Following the dovish hold in August, we had deferred our base-case tightening call to 25 bps hikes in December 2026 and February 2027 (from October and December 2026 earlier). Developments since then point to an earlier start and more extended tightening cycle,” Goldman Sachs said in a report.

The repo rate was last raised in February 2023, up 25 bps to 6.50%.

Supply chain disruptions and elevated crude oil prices due to geopolitical tensions are at the root of inflationary pressures, prompting even developed economies such as the US and Japan to raise rates. Domestically, economists see inflation rising above the RBI’s tolerance level of 6% in the third quarter as the primary concern, driving expectations of a rate hike. The weather is another factor.

“I expect the Q2 and Q3 inflation numbers to surpass RBI’s current projections because monsoons have been bad and crude oil prices have been higher than RBI’s expectations. If geopolitics and crude prices continue the way they are, I expect Q3 inflation to peak at 6.2% to 6.3%,” Canara Bank chief economist Madhavan Kutty G told ET.

Bank of Baroda chief economist Madan Sabnavis took a contrarian call on the policy rate.

“The current macroeconomic condition remains the same with similar kinds of risks as outlined in August. So why would RBI act differently this time? Besides, a rate hike now can dent festival spending while transmission would be sticky on the deposit side,” he said, adding that deferring a rate hike would cool bond yields.

He, however, expects the repo rate to rise to 6% in this cycle as inflation is expected to climb.

IDFC First Bank expects December quarter inflation at 6.1%, while Bandhan AMC sees it at 6%-plus. RBI forecast inflation at 4.7% in the September quarter and 5.9% in the December quarter in its August policy. India’s retail inflation was at 4.45% in July and 4.82% in August. The central bank targets 4% inflation with a tolerance band of 2% on either side.

Brent crude prices have risen sharply since August, when they averaged around $91 per barrel. Prices crossed $100 in early September and rose to around $113 on September 9, amid heightened supply disruptions. Brent ended September around $103, significantly higher than RBI’s FY27 forecast of $85 per barrel.

Two other factors strengthening expectations of a rate hike are stronger-than-expected economic growth and a narrowing interest rate differential between India and the US, which is making investments in developed markets more attractive. The India-US 10-year yield differential has narrowed to its lowest in decades, at 189 basis points, with yields at 7.21% and 5.32%, respectively.

Also Read: RBI may increase rates by 0.25 pc in Oct policy amid inflationary pressures, experts poll shows

“Growth has withstood the shocks of the West Asia war and there is more confidence now that the economy will be able to withstand a moderate tightening of policy rates,” Yes Bank chief economist Indranil Pan said in a report on October 1.

June quarter GDP growth at 7.8% was 80 bps higher than the RBI’s forecast. High-frequency indicators for July-August show some moderation, but the narrative of robust growth continues, according to Barclays.

The US Fed, which hiked rates in September, is expected to raise them again in October. Against this backdrop, economists say it becomes difficult for India to hold rates, as a wider interest rate differential could make US assets more attractive to global investors.

“The upturn in the dollar and broad-based commodity price pressures is a fresh headache for RBI. Even though local dynamics may be somewhat different, India must compete for the same pool of capital and thus local rate dynamics must respect the rising global rate settings,” said Suyash Choudhary, CIO, fixed income, Bandhan AMC.