SBI Research Forecasts Inflation Spike; Predicts RBI Repo Rate Hike
SBI Research expects CPI inflation to cross 6.5% in Oct-Nov, prompting a potential 25-bps repo rate hike by the RBI.
In a significant update for India's economy, SBI Research has projected a sharp rise in consumer price index (CPI) inflation, suggesting that the Reserve Bank of India (RBI) may be forced to tighten its monetary policy. According to the research house's pre-Monetary Policy Committee (MPC) report, inflation is expected to hit 5.65% in September and surge past the 6.5% mark during October and November.
Potential 25-Basis-Point Interest Rate Hike
With inflationary pressures mounting, SBI Research believes the central bank is likely to raise the policy repo rate by at least 25 basis points during its upcoming meeting scheduled for October 5-7. The current repo rate stands at 5.25 per cent. This move would represent a notable departure from the RBI's previous stance, where the MPC had unanimously decided to keep rates unchanged during its August meeting.
“We believe the balance of risks has tilted decisively towards a 25-bps rate hike at this juncture,” the report stated, citing several critical factors driving this shift:
- Broadening and intensifying inflationary pressures.
- Worsening global macroeconomic conditions.
- Changing liquidity conditions within the domestic market.
- Renewed repricing of risks across global financial markets.
Broadening Inflationary Pressures
The report highlights that inflation is no longer confined to a few specific sectors but is becoming increasingly broad-based. While only 22 commodities accounted for 90% of the weighted contribution to CPI inflation in January, that number has expanded to 51 commodities as of August. This indicates that price pressures are spreading across a much wider range of goods.
Data shows that retail inflation climbed to 4.82% in August, up from 4.45% in July, signaling a strengthening trend that the central bank must address.
Currency Weakness and Monsoon Risks
Beyond domestic price trends, SBI Research identified the weakness of the rupee as a major risk factor. The currency is facing pressure due to several external drivers, including:
- A dominant and strong US dollar.
- High demand for foreign currency from corporate entities and oil marketing companies.
- Persistent selling activity by foreign portfolio investors.
Furthermore, the report warns of agricultural risks stemming from a weak monsoon. The 2026 southwest monsoon reached only 87% of its long-period average, with 43% of districts reporting deficient rainfall. The combination of strong El Niño conditions and the possibility of below-normal rainfall in October could threaten Rabi crops, potentially adding further fuel to food inflation.
Outlook for GDP and Inflation Projections
As the RBI prepares for its October review, SBI Research anticipates that the central bank may revise its official forecasts. The research house expects the RBI to increase its FY27 GDP growth forecast by 30 basis points and its inflation projection by 20 basis points. While a spike is expected in the coming months, the report suggests that inflation may finally ease below the 6% threshold in early 2027.