RBI rate hike looms as inflation pressures build

Why the RBI is expected to act

For months, the Reserve Bank of India has had room to wait. Even when geopolitical tensions sparked a surge in oil prices, domestic inflation remained benign enough for policymakers to hold steady.

That breathing space has disappeared. Consumer inflation in India accelerated to 4.82% in August, marking the third consecutive month it has run above the central bank’s medium-term target of 4%. Prices are now rising at or above that target across nearly half the consumer price index basket.

At the same time, India’s economic growth remains highly resilient, with gross domestic product expanding by 7.8% in the April-to-June quarter. With strong growth and broadening price pressures, a majority of analysts believe the central bank has little reason to delay.

In a Reuters poll of 61 economists, 35 expect the Monetary Policy Committee to announce a 25-basis-point increase to the benchmark repo rate at its meeting on Wednesday. Swap markets have gone even further, fully pricing in an increase in borrowing costs.

If the RBI does act, it will raise the repo rate from its current level of 5.25%, where it has sat for nearly 10 months. It would represent a sharp turn in policy; throughout 2025, the central bank cut rates by a cumulative 125 basis points from a peak of 6.5%.

Taking away the monetary punchbowl

"We now sense that the RBI has little reason to wait," said Rahul Bajoria, India and ASEAN economist at BofA Global Research. Bajoria expects the central bank to embark on a 100-basis-point tightening cycle starting this month.

This is no longer just about reversing recent rate cuts, Bajoria said, but "actually taking away the monetary punchbowl before inflation risks become entrenched."

Other major central banks, including the US Federal Reserve and the Bank of Japan, have already raised rates since conflict in the Middle East broke out seven months ago. As global competition for capital intensifies, India’s low inflation-adjusted interest rates are starting to look out of step.

The Indian rupee also remains under pressure, trading about 1% off the record lows it hit in May. Analysts warn that if the RBI decides to hold rates steady on Wednesday, the decision could trigger immediate pushback in the markets.

"A hold will not be taken positively by the currency market and even the long end of the bond market may face some pressure," said Vivek Rajpal, Asia macro strategist at JB Drax Honore. Rajpal argues that going to a neutral rate is part of the solution, and that the RBI needs to signal it is open to raising rates further if necessary.

How high could rates go?

While there is broad agreement that a hike is coming, economists disagree on how far the central bank will go.

Analysts at Nomura and Barclays are forecasting a shallow tightening cycle of 25 to 50 basis points. In contrast, those at BofA and ANZ expect a more aggressive path, predicting cumulative rate hikes of between 75 and 100 basis points.

Swap markets are currently pricing in around 100 basis points of rate hikes over the next year, and about 140 basis points over the next 24 months.

Whether the RBI confirms these expectations will depend on its updated forecasts for growth and inflation, and whether it alters its neutral policy stance. The central bank may choose to keep its options open on Wednesday, leaving details of any longer-term tightening cycle until its December meeting.