Inflation Alarm: RBI May Hike Repo Rate to 6.25%
SBI Mutual Fund warns that the RBI may need to hike the repo rate to 6.25% as retail and wholesale inflation continue to climb.
The Reserve Bank of India (RBI) might be forced to push its benchmark repo rate hike to at least 6.25 per cent to keep a lid on persistent inflation risks. This assessment comes from SBI Funds Management, highlighting a growing concern over the recent surge in both retail and wholesale price indices.
The Push for Higher Rates
According to the October 2026 Market Outlook report released by the fund house, the current monetary stance may not be enough. Despite the RBI recently increasing the repo rate by 25 basis points to 5.50 per cent, SBI Funds Management suggests that further tightening is on the horizon.
The report emphasizes that to achieve a real rate of approximately 1 per cent, the policy rates need to move toward the 6.25 per cent mark. This would imply an additional increase of 75 basis points from the current level, although a specific timeline for these hikes has not been detailed.
Inflation Numbers Spark Concern
The warning is backed by recent government data showing a worrying trend in inflation:
- Retail Inflation: Jumped to 5.54 per cent in September, up from 4.83 per cent in August.
- Wholesale Inflation: Accelerated to 11.39 per cent, compared to 9.92 per cent previously.
The fund house pointed out that even with a forward estimate of 5.20% for Consumer Price Index (CPI) inflation for FY27, the headline CPI remains nearly 120 basis points above the RBI's official 4% target. This gap, they argue, clearly justifies additional policy interventions.
Potential Risks on the Horizon
The RBI has already projected inflation at 6 per cent for the third quarter of FY27 and 5.7 per cent for the fourth quarter, signaling that price pressures are far from over. SBI Funds Management identified several triggers that could push inflation beyond the RBI's upper tolerance limit of 6 per cent for two consecutive quarters:
- Rising crude oil prices.
- Potential spikes in food inflation.
- Robust domestic demand.
"Accordingly, the near-term path for the policy rates is either a hike or hold with rate cuts being off the table," the report stated.
The Liquidity Challenge
Beyond just the interest rates, the fund house cautioned that surplus liquidity within the banking system could act as a hurdle. If there is too much liquidity, the impact of rate hikes might be weakened, making aggressive liquidity management essential for the RBI to effectively control inflation.
All eyes are now on the next Monetary Policy Committee (MPC) meeting, scheduled for December 2-4. The committee will analyze the freshest inflation data before deciding whether to maintain the current status or initiate further rate increases.