SBI Research Bets on 50-bps December Rate Hike as Inflation Spreads
SBI Research forecasts a 50-bps rate hike in December due to rising inflation and crude oil prices. Read the detailed analysis here.
In a significant projection for India's financial landscape, SBI Research has maintained its forecast for a December rate hike of 50 basis points. This prediction comes amid a climate of broadening inflationary pressures and the Reserve Bank of India's (RBI) clear shift toward a more restrictive monetary policy.
The Push for Tighter Monetary Policy
Analyzing the minutes from the October Monetary Policy Committee (MPC), SBI Research noted that the Governor's communication reflects an increased focus on future risks. With the central bank already ruling out any rate cuts in the immediate future, the focus has shifted toward the possibility of further tightening to keep prices in check.
The report suggests that the RBI may implement this 50-bps increase in one of two ways:
- A Standard Hike: A straightforward 50-basis-point increase in the repo rate.
- An 'Exotic' Hike: A combination of a 25-basis-point repo rate hike paired with a 25-basis-point asymmetric widening of the Liquidity Adjustment Facility (LAF) corridor.
Two Paths for the December Policy
The research outlines the specific mechanics of these two potential scenarios for the upcoming December meeting. If the RBI opts for a direct route, the repo rate could climb to 6 per cent. Alternatively, if they choose the asymmetric approach, the repo rate would rise to 5.75 per cent, while the Marginal Standing Facility (MSF) rate would increase to 6.25 per cent, leaving the Standing Deposit Facility (SDF) rate at 5.50 per cent. This latter method is seen as a way to ensure market stability despite global economic uncertainty.
Inflation: The Primary Driver
The urgency for a rate hike is driven largely by the expanding nature of inflation. SBI Research highlighted a worrying trend: the number of commodities contributing to 75 per cent of the Consumer Price Index's (CPI) weighted contribution grew from 25 items in August to 31 in September. This indicates that price hikes are no longer isolated but are spreading across a wider array of goods.
Adding to the volatility are the energy markets. Brent crude prices are projected to average USD 110 per barrel over a 15-day forecast period, which poses a significant risk to the overall inflation outlook. Inflation is expected to peak below 6.5 per cent in November.
The RBI's Stance and Growth Outlook
Earlier this month, the MPC unanimously raised the repo rate by 25 basis points to 5.50 per cent, transitioning its stance to "calibrated tightening." Governor Sanjay Malhotra has indicated that future decisions—whether a pause or a further hike—will depend on the evolution of economic growth and inflation.
Looking ahead, the RBI's projections include:
- Retail Inflation: Projected at 6 per cent for the third quarter of FY2026-27, moderating to 5.7 per cent in the fourth quarter.
- GDP Growth: Projected at 7.1 per cent for FY2026-27.
The financial world will now be watching the next MPC meeting, scheduled for December 2-4, where policymakers will evaluate these growth and inflation conditions to decide the next move for India's interest rates.