The Reserve Bank of India (RBI) will raise the repo rate at its upcoming October monetary policy meeting as rising inflation risks, elevated global bond yields and pressure on the rupee warrant tighter monetary conditions, according to Pranjul Bhandari, Chief India Economist and Macro Strategist at HSBC.
Bhandari said the RBI should not wait until December to act and should combine a rate hike with 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 rates and change its policy stance as well. While the central bank could consider a 50-basis-point hike, Bhandari sees only a small possibility of such a move and cautioned against it, saying an increase of that magnitude could cause market disruptions.
According to Bhandari, the external environment has become increasingly challenging for emerging markets such as India. Bond yields across advanced economies are rising amid concerns over fiscal excesses and increased investment demand linked to artificial intelligence.
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“Cost of funds is much higher and yields are rising,” she said, adding that the US Federal Reserve's hawkish stance has further complicated the macroeconomic environment for emerging markets.
Bhandari also flagged persistent weakness in the rupee, which she said has remained at concerning levels for several months. At the same time, she expects inflation to accelerate in the coming months, with CPI inflation projected at around 5.5% in September and above 6% between October and December.
Despite these headwinds, India's growth remains resilient, supported by exports. Bhandari expects mid-tech exports to strengthen following the signing of free trade agreements.
On geopolitical risks, she said any agreement between the US and Iran could remain fragile, adding to uncertainty for global markets and commodities.
Overall, Bhandari expects the RBI to tighten liquidity and raise rates in October rather than delay action until December.
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