RBI repo rate could rise by 25 basis points as inflation and oil risks mount

The Reserve Bank of India is facing mounting pressure to raise its benchmark interest rate next week, with economists and bankers warning that resurgent inflation and a spike in global oil prices will force a policy reversal.

A majority of analysts polled by PTI ahead of the October 7 monetary policy meeting expect the RBI to raise its repo rate by 25 basis points to 5.50%. If the six-member Monetary Policy Committee decides to hike, it will mark a swift pivot from the rate-cut cycle that began in 2025 and has since kept the repo rate at 5.25%.

Why is the RBI expected to hike the repo rate?

The immediate catalyst is a sharp rise in consumer prices, combined with geopolitical instability in West Asia that has pushed crude oil prices back above $100 a barrel. India’s retail inflation accelerated to an eight-month high of 4.82% in August, marking the third consecutive month that price growth has stayed above the central bank’s 4% target.

The narrow gap between the interest rate and inflation has left India with a real interest rate of just 0.4%. Economists say that is too thin for an economy growing as strongly as India's.

"Gradual normalisation of policy is needed as headline inflation is higher," said Gaura Sengupta, an economist at IDFC First Bank, adding that a rate hike is necessary "to ensure real rates are not negative in the coming quarters."

Geopolitical risks are also feeding directly into domestic costs. Aditi Nayar, chief economist at ICRA, warned that the surge in oil prices will likely force the central bank to revise its retail inflation forecasts upward. "The recent surge in crude oil prices to above $100/barrel could likely lead to an increase in the retail selling price of petrol and diesel," she said, noting this would cause price pressures to spread further through the economy.

Evidence of that broadening is already appearing. Rajani Sinha, chief economist at Careedge Ratings, pointed out that 19% of the 358 items in India's consumer price basket recorded inflation above 6% in August, up from 13% in March.

How does the US Federal Reserve decision affect India?

The RBI is also under pressure to keep pace with global peers. On September 16, the US Federal Reserve raised its target range by 25 basis points to 3.75–4.00%. That decision has narrowed the policy gap between the US and India, adding downward pressure on a rupee that has struggled despite steady foreign capital inflows.

Kanika Pasricha, chief economic advisor at Union Bank of India, said that coordination with global central bank hikes, rising inflation risks, and strong economic growth "provide policy space to hike."

What are the arguments against a rate hike?

Opinion remains divided on whether the central bank will actually pull the trigger or hold its fire. Sachchidanand Shukla, group chief economist at Larsen & Toubro, argued that the RBI is more likely to maintain the status quo. He pointed out that there is still no clear evidence of demand-led inflation or overheating in the domestic economy, meaning the central bank can afford to wait.

Furthermore, some analysts argue that raising rates is an ineffective tool against supply-side shocks, as a domestic rate hike cannot lower global oil prices. However, proponents of a hike warn that waiting too long allows these supply shocks to filter into broader core inflation.

On liquidity, experts expect the central bank to avoid blunt instruments like raising the cash reserve ratio. Sunil Sanghai, founder and chief executive of NovaaOne Capital, said the RBI would likely prefer market-based tools such as variable rate reverse repo auctions and open market operations to absorb excess cash from the banking system without hurting lenders that did not participate in recent currency swaps.