RBI May Raise Repo Rate by 100 BPS to Fight Inflation
A new SBI Capital Markets report suggests the RBI could raise the repo rate by 75-100 basis points to combat elevated inflation.
The Reserve Bank of India (RBI) could implement a significant increase in the repo rate, potentially raising it by 75 to 100 basis points during the current tightening cycle. According to a recent report by SBI Capital Markets, this move is anticipated as inflation is expected to remain high before showing signs of relief in the next financial year.
A Shift Toward Calibrated Tightening
The report highlights that the Monetary Policy Committee's recent decision to hike the repo rate by 25 basis points, alongside a strategic shift in stance from "Neutral" to "Calibrated Tightening," underscores a heightened commitment to controlling inflation. While the base case suggests gradual rate increases, the brokerage noted that a larger hike in December 2026 remains a possibility, depending heavily on inflation data from September and October.
The outlook for inflation suggests a complex timeline:
- Consumer Inflation: Expected to peak in the third quarter of FY27, with a trend toward staying below 5 per cent year-on-year after the first quarter of FY28.
- Wholesale Price Inflation: Could begin to ease as early as March 2027 due to favourable base effects.
- Policy Pivot: The policy cycle is expected to turn around in the first quarter of FY28 as the balance between growth and inflation evolves.
Economic Growth and Emerging Risks
Despite the looming interest rate hikes, India's economic trajectory has shown remarkable strength. In the first quarter of FY27, real Gross Domestic Product (GDP) expanded by 7.8 per cent year-on-year, surpassing the market expectation of 7.1 per cent. This growth was bolstered by a 9.2 per cent rise in manufacturing and an 11.9 per cent increase in gross fixed capital formation.
However, the report identifies several critical risks that could dampen consumption in the latter half of FY27, including:
- Rising Borrowing Costs: Higher interest rates may impact consumer spending.
- Rural Sentiment: Subdued sentiment and weaker kharif sowing could impact the rural economy.
- Global Pressures: Prolonged geopolitical conflicts and crude oil prices hovering around USD 100 per barrel could sustain cost-push inflation.
Impact on Banking and Bond Markets
The tightening cycle is expected to have a dual impact on the financial sector. In the near term, higher interest rates are likely to support bank margins. However, non-food credit growth may experience a gradual slowdown toward the end of FY27. While FY27 remains a favourable year for banks, the report suggests that bonds might regain significant investor interest in FY28.
Furthermore, the report warned of global uncertainties, including rising yields in advanced economies and capital outflows from emerging markets, which continue to add pressure to the financial landscape. Currently, benchmark 10-year government bond yields, which rose by approximately 70 basis points in 2026, are expected to remain elevated until geopolitical tensions subside and inflationary pressures moderate.