“We expect a first rate hike by the MPC on October 7 as the domestic inflation trajectory sees upside risks from higher global oil prices, while growth has stayed remarkably resilient,” Barclays economists Aastha Gudwani and Amruta Ghare said in a note, adding that the terminal rate is seen at 5.75 per cent.
The need for a hike is driven by both domestic and external factors, said Gaura Sen Gupta, chief economist at IDFC First Bank.
“Consumer Price Index (CPI)-based inflation is expected to average 5.2 per cent in 2026-27 (FY27), marginally higher than the RBI’s estimate,” said Sen Gupta. “Crude oil prices have stayed elevated for longer than expected, which raises the risk of inflation pressures becoming broad-based.”
Retail inflation rose to 4.8 per cent in August from 4.45 per cent in July. Crude oil has stayed above $100 per barrel in recent weeks.
Aditi Nayar, chief economist at Icra, said retail petrol and diesel prices may need to be raised by as much as ₹8-9 per litre at current crude prices, which would make the generalisation of inflationary pressures more acute. “A pre-emptive rate hike in October may be appropriate, with another one in December based on how the price situation pans out,” she said.
Madan Sabnavis, chief economist at Bank of Baroda, was the only respondent to say that the MPC is expected to keep rates unchanged, as a hike just before the festival season would do little to improve transmission to deposit rates, especially with inflows under the Foreign Currency Non-Resident (Bank), or FCNR(B), scheme. “They can wait for one more policy,” he said.
Respondents also expect the central bank to raise its FY27 growth forecast from 6.7 per cent, after GDP growth of 7.8 per cent in the April-June quarter, 80 bps above the RBI’s projection. “High-frequency indicators show that growth remains strong in Q2 also,” said Sen Gupta.
The market will closely watch the RBI’s strategy on liquidity management, which is in surplus of over $s 4.5 trillion. The surplus liquidity has caused the weighted average call rate (WACR), the operating target of the monetary policy, to hover at the lower band of the policy corridor. Following the open market operation of bond sales in September, WACR aligned with the repo rate for a short period.
Majority of the respondents expect the RBI to raise its FY27 inflation forecast from 5 per cent now, with estimates of the revision ranging from 10-20 bps to a larger upward revision. They said stronger food inflation and persistent crude oil shock could push producers to pass on higher input costs to consumers.
On stance of the policy which is neutral at present, most participants said they don’t expect a change.
