RBI to Hold Repo Rate in October, Start Hike Cycle in December: BoB
Bank of Baroda predicts RBI will hold repo rates in October before starting a 50-75 bps hike cycle in December due to inflation risks.
The Reserve Bank of India (RBI) is anticipated to maintain the current repo rate during its upcoming October policy meeting, according to a recent report from Bank of Baroda (BoB). While inflation risks are mounting, the lender suggests the central bank will likely adopt a cautious stance before embarking on a tightening cycle later this year.
A Cautious Wait in October
As the Monetary Policy Committee (MPC) convenes, BoB expects the central bank to keep both the repo rate and its policy stance unchanged. The report suggests the policy repo rate is expected to remain at 5.25%. This "wait-and-watch" approach is driven by several domestic and global factors:
- Festive Season Demand: Implementing a rate hike just before the peak festive spending period could dampen consumer demand and impact overall growth momentum.
- Liquidity Surplus: There is currently a significant liquidity surplus in the banking system, which may make the transmission of any potential rate hikes challenging.
- Economic Resilience: India's GDP growth has shown remarkable strength, providing the RBI with the necessary breathing room to keep rates steady for now.
The Looming December Hike Cycle
While October looks to be a period of stability, the outlook for the end of the year suggests a shift toward tighter monetary policy. BoB forecasts that the RBI will likely begin a rate-hike cycle in December. This cycle is expected to deliver a cumulative tightening of 50 to 75 basis points.
Several emerging pressures are pushing the central bank toward this eventual tightening:
- Rising Inflation: Domestic CPI inflation has climbed to 4.8 per cent. Although this remains within the RBI's target range of 2-6 per cent, food price pressures are a growing concern.
- Surging Crude Prices: Since the August policy, crude oil prices have jumped by 28 per cent, fueled by renewed tensions between the US and Iran.
- Bond Yield Pressures: India's 10-year bond yield has climbed 44 basis points to a 29-month high of 7.12 per cent, driven by FPI outflows and expectations of future hikes.
Robust Economic Indicators
Despite the inflationary headwinds, India's economic fundamentals remain strong. The country's GDP growth surpassed expectations in the first quarter of FY27, hitting 7.8 per cent against the RBI's initial estimate of 7 per cent. This performance was bolstered by significant investment and consumption levels.
The manufacturing and services sectors also continue to show resilience. Manufacturing PMI rose to 55.1 in September from 52.8 in August, while the services PMI saw an increase to 55.8 from 54.1. Based on this stellar performance, BoB expects the overall GDP growth for FY27 to fall within the 7-7.2% range.
In summary, while the immediate future suggests a period of stability to protect festive demand and growth, the Bank of Baroda warns that the central bank is preparing for a necessary tightening phase to combat rising global and domestic economic pressures.