The Reserve Bank of India (RBI) is set to announce its fourth bi-monthly monetary policy for FY27 on October 7, with the Street widely expecting the central bank to begin a rate-hiking cycle as inflationary pressures build and major global central banks turn increasingly hawkish.
Economists expect the RBI Governor Sanjay Malhotra-led Monetary Policy Committee (MPC) to raise the benchmark repo rate by 25 basis points to 5.50%.
If delivered, the hike would be the RBI's first since February 2023 and take the repo rate up from 5.25%, where it has remained for nearly 10 months. The MPC had cut the repo rate by a cumulative 125 basis points in 2025, from 6.50% to 5.25%.
While the market has largely priced in a rate hike, there is less consensus on whether the RBI will also change its policy stance. However, worsening global macroeconomic conditions, narrowing interest-rate differentials with other major economies and rising expectations of higher inflation have led some analysts to anticipate a shift in stance alongside the start of the tightening cycle.
The October 5-7 MPC meeting comes against a backdrop of rising inflation, elevated global bond yields, higher crude oil prices, a weakening rupee and a global shift towards higher interest rates.
“We expect the RBI to kick off the rate hike cycle with a cautious 25 bps increase, while retaining a neutral stance and signalling a higher-for-longer rate environment; a 50 bps hike remains an outside risk as tighter global financial conditions increasingly shape the RBI's reaction function,” said Madhavi Arora, Lead Economist at Emkay Global Financial Services Ltd.
Pranjul Bhandari, Chief India Economist and Macro Strategist at HSBC, also expects the RBI to raise rates in October, alongside measures to absorb surplus liquidity from the financial system.
“Take out liquidity with the variety of tools you have and hike interest rates. Waiting until December would be too late,” Bhandari said.
She expects the RBI to raise the repo rate and change its policy stance to “withdrawal of accommodation”.
India's CPI-based retail inflation is trending above the RBI's 4% target, while WPI inflation stands at 9.92%. The rupee has also depreciated by around 6% so far this year, adding to imported inflation risks.
According to Purvi Mundhra, Lead Economist at Choice Institutional Equities, the rate hike itself is already largely priced in. The two-year Indian government bond yield has risen 65 basis points since June, while the 12-month Treasury bill yield has climbed 57 basis points — moves that are more than what would typically be warranted by a single rate hike.
She expects a 25-basis-point hike, saying the key variable for markets will be the RBI's stance.
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“The unpriced variable is the stance. A hike delivered with a shift away from neutral signals a series rather than insurance, and it reprices the belly and the long end, which is exactly where H2 issuance has been concentrated,” Mundhra said.
Liquidity Management
While inflation is emerging as the key concern, with price pressures broadening beyond food, FCNR-led excess liquidity continues to keep monetary conditions accommodative despite the RBI's tactical use of sterilisation tools. Managing surplus liquidity is therefore likely to remain an important challenge for the central bank.
“The October policy should offer greater clarity on the RBI's sterilisation strategy, with a further OMO sales announcement possible,” Arora said.
System liquidity remains comfortably in surplus, while money supply growth has remained steady, giving the RBI room to tighten monetary conditions without significantly disrupting credit growth.
Meanwhile, for the equity market, Vinit Bolinjkar, Head of Research at Ventura Securities, believes a repo rate hike could pressure rate-sensitive sectors like banks, auto, and realty in the short term, but may support the rupee and ease FII outflow pressure by narrowing the yield gap with the US.
“For bonds, a hike is largely priced in; the bigger market-mover will be the RBI's forward guidance and tone on future rate action,” Bolinjkar added.
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