RBI should hike rate by 25 bps in October to counter external shocks: Report

New Delhi: The Reserve Bank should raise the benchmark interest rate by 25 basis points next month and again in December as a countermeasure to persistent external shocks, elevated crude oil prices and signs of broader inflationary pressures, an SBI research report said on Friday.

The next meeting of the Monetary Policy Committee (MPC), the RBI's rate-setting panel, is scheduled for October 5-7, 2026.

In August, the central bank kept the short-term lending rate (repo) unchanged at 5.25 per cent for the fourth time in a row.


"Just one month back, there were practically not much talks of rate hikes, and most (if not all) expected a 'prolonged pause'. But the situation has changed drastically since then," it said.

SBI Ecowrap, prepared by the bank's Economic Research Department, said its call for a rate hike is independent of any forthcoming US Federal Reserve action, while crude prices have recently crossed USD 100 per barrel amid heightened geopolitical uncertainties.

It also estimated that crude prices could reach USD 123 per barrel over the next 15 days amid heightened geopolitical uncertainties.

"Now, we strongly advocate a 25-bps rate hike in the upcoming October policy (followed by another in December in quick succession), factoring in the myriad evolving undershoots...," the report said, adding that the rate hike call is agnostic to the August CPI inflation print that could come around 4.8-4.9 per cent.

If oil prices remain at high levels, inflation print for October and November should move towards 6.5 per cent or higher, it said.

SBI Research said CPI-based retail inflation is showing incipient signs of becoming more broad-based.

The risk of further generalisation is particularly pronounced in sectors where input prices are currently rising faster than output prices, suggesting that the pass-through has not been enough on the producer's side, evident in crude petroleum and natural gas, beverages, pharmaceuticals, and electronics.

"With inflation already becoming less concentrated and significant cost pressures yet to be fully transmitted, waiting for the entire pass-through to materialise in CPI would risk responding after inflation has become more entrenched. Restaurant inflation rose sharply as onions, edible oil, and LPG became more expensive," it said.

On liquidity, the report said the FCNR (B) inflows have swelled the banks' lendable resources while creating a surplus liquidity in the banking system.

"By design or by fluke, the mobilised amount of USD 127 billion almost matches the fund gap in the banking system. This implies that the current spike will have a natural drawdown given the strong demand for credit supported by equally strong Q1 FY27 GDP growth figures," the report said.

Thus, in all likelihood, the system liquidity will level out by the end of the fiscal year if the anticipated credit demand is met, it said, adding that the RBI Bank Lending Survey for Q1:2026-27 also indicates strong credit demand in H2 FY27.