RBI May Begin 75-bps Rate Hike Cycle as Inflation Pressures Broaden
Union Bank of India predicts a 75-bps rate hike cycle as inflation pressures broaden due to energy and food costs.
The Reserve Bank of India (RBI) could be on the verge of a significant shift in monetary policy. According to a research report by Union Bank of India (UBI), the central bank may initiate a rate hike cycle totaling 75 basis points starting this October, driven by widening inflation pressures across various sectors.
Broadening Inflationary Pressures
The UBI report suggests that the inflation basket is facing multifaceted challenges that make monetary tightening increasingly necessary. Several key factors are contributing to this rising cost of living:
- Rising Energy Costs: Sustained high energy prices are feeding into the cost of goods and services.
- Semiconductor Prices: Higher global prices for semiconductors are impacting manufacturing and consumer goods.
- El Niño Effects: Supply disruptions linked to El Niño are exacerbating price volatility.
The report highlights that commodities were responsible for approximately 55 per cent of the rise in headline inflation between January and August. Specifically, headline CPI rose by 209 basis points between January and August 2026, with 116 basis points attributed to the spike in commodity prices.
Food Inflation and Monsoon Concerns
Food prices are expected to be a primary driver of inflation. The report projects food inflation to exceed 7 per cent in FY27, a massive jump from the 0.2 per cent seen in FY26. The pressure is expected to extend beyond volatile vegetable prices to include cereals, pulses, sugar, and edible oils.
Agricultural output remains a concern due to environmental factors. A 13 per cent monsoon rainfall deficit and declining reservoir levels—currently at 72 per cent compared to 92 per cent last year—could weigh heavily on the upcoming rabi crop, further driving up cereal prices.
Long-term Inflation Projections
The research team warns that inflation may remain a persistent challenge for the Monetary Policy Committee (MPC). Key projections include:
- CPI Forecast: UBI projects CPI-based inflation at 5.4 per cent for FY27, which is higher than the MPC's 5 per cent forecast.
- Peak Inflation: Inflation is expected to peak in the third quarter of FY27 but remain above the 6 per cent upper limit of the target range throughout the second half of the fiscal year.
- Core Inflation: Core inflation, which excludes food and fuel, rose from 3.4 per cent in January to 4.44 per cent in August. It is projected to reach 4.3 per cent in FY27.
With crude oil hovering around USD 100 per barrel and strong domestic demand strengthening the pricing power of businesses, the report suggests that inflation will remain a critical concern for policymakers through the first half of FY28.