RBI may deliver 50 bps ‘jumbo’ hike in December, repo rate seen at 6%: SBI Research
SBI Research predicts a 50 bps jumbo rate hike by December as inflation pressures and capital outflows mount. Read the full report here.
The Reserve Bank of India (RBI) could be preparing for a significant shift in monetary policy. According to a new report from SBI Research, the central bank may implement a "jumbo" repo rate hike of 50 basis points by December, potentially pushing the rate up to 6 per cent to combat rising inflation and capital outflows.
A Shift Towards Explicit Tightening
The latest analysis suggests that the RBI's stance has already begun to evolve. Following the October policy meeting, where the repo rate was increased by 25 basis points to 5.50 per cent, the central bank moved from a "neutral" stance to "calibrated tightening." This transition indicates a shift from mere watchfulness to active intervention to stabilize the economy.
SBI Research notes that the policy options for the RBI in the near future are becoming increasingly narrow, leaving the regulator with essentially two choices: a rate hike or a pause, depending heavily on how inflation and growth conditions unfold.
Inflation and Capital Outflow Pressures
The drive for higher interest rates is fueled by growing economic pressures. Key factors identified in the report include:
- Rising Inflation: Inflation is projected to peak at approximately 6.8 per cent around November 2026.
- Currency Volatility: The rupee has recently hit a five-month low, exacerbated by a rapidly strengthening US dollar.
- Capital Outflows: Debt outflows reached a significant USD 2.1 billion in September alone.
Proposed Measures to Support the Rupee
To stabilize the rupee and encourage long-term investment, SBI Research has suggested several strategic moves. One key recommendation is the introduction of a graded long-term capital gains structure for investments held for more than three years, aimed at attracting more equity inflows into the country.
Additionally, the report suggests:
- Interest Rate Corridor: Widening the effective interest rate corridor by raising the Marginal Standing Facility (MSF) rate, even if the policy rate remains unchanged.
- Liquidity Management: Continuing the use of conventional tools like open market operations and variable rate operations rather than relying on the Cash Reserve Ratio (CRR).
- Export Realisation: Shortening the period for foreign currency export realisation and repatriation from nine months to six months as a standard.
The Road Ahead for the Economy
While the report warns of the need for an "agile and tactile response"—which could include an off-cycle move if conditions worsen—the RBI maintains a cautiously optimistic outlook for the broader economy. The central bank has recently raised its FY27 GDP growth forecast to 7.1 per cent, while forecasting CPI inflation to settle at 5.2 per cent.