RBI Rate Hikes to Depend on Food Inflation and Crude Oil Prices
JM Financial predicts a 50-75 bps rate hike cycle as food inflation and crude oil prices impact RBI monetary policy decisions.
The future trajectory of interest rate hikes by the Reserve Bank of India (RBI) will be heavily dictated by two volatile factors: persistent food inflation and fluctuating crude oil prices. According to a new research report by domestic brokerage firm JM Financial, the current monetary tightening cycle is expected to remain relatively shallow, likely ranging between 50 and 75 basis points.
Inflationary Pressures on the Rise
The report highlights a concerning trend in retail inflation, which climbed to 5.54 per cent in September, up from 4.82 per cent in August. This surge marks the highest level recorded since November 2024. Food inflation remains the primary culprit behind these rising numbers, hitting 7.7 per cent and marking the fifth consecutive month of upward pressure.
JM Financial anticipates that inflation could escalate further, potentially reaching 6 per cent during the October-December quarter of the current financial year, before gradually easing to 5.7 per cent in the January-March quarter.
Supply-Side Risks and Agricultural Concerns
Several environmental and supply-side factors are threatening to intensify food price pressures, particularly in rural India. Key concerns include:
- Deficient Rainfall: Pan-India rainfall was reported to be 13 per cent below the long-period average as of September 30.
- Sowing Declines: Kharif sowing saw a decline of 1.1 per cent as of October 2.
- Water Scarcity: Depleted reservoir levels and the potential persistence of El Nino conditions until February 2027 pose significant risks to agricultural output.
The brokerage warned that if these supply-side issues are not addressed through timely interventions, food price pressures could spread across the broader economy.
The Role of Crude Oil and Global Crises
Beyond food, the trajectory of crude oil prices is expected to be a decisive factor in determining the extent of the RBI's rate increases. The report notes that inflationary pressures are also visible in the restaurant and processed food sectors, with restaurant inflation remaining elevated for the sixth straight month. This trend is largely attributed to supply disruptions linked to the ongoing West Asia crisis.
JM Financial suggested that if crude oil prices remain high for a sustained period, the government may need to evaluate fiscal measures to attract foreign institutional investor flows. Additionally, the RBI is expected to continue draining excess liquidity from the banking system to ensure overnight call rates align with the repo rate.