RBI MPC begins amid rising bets on a repo rate hike to 5.5%: What experts expect

The Reserve Bank of India’s Monetary Policy Committee (MPC) begins its three-day meeting on Monday against a backdrop of rising crude oil prices, higher global bond yields and growing inflation risks, with a 25-basis-point repo rate hike increasingly expected by economists.

The MPC will meet from October 5 to 7, with its decision due on October 7. The repo rate currently stands at 5.25%. A 25-basis-point increase would take it to 5.50% and mark the first rate hike since February 2023.

A Reuters poll published ahead of the meeting showed that 35 of 61 economists, or nearly 60%, expect the MPC to raise the repo rate by 25 basis points to 5.50%. The poll also showed that 29 of 53 economists expect at least one more 25-basis-point hike by December.

The expectations come as retail inflation rose to 4.82% in August, moving above the RBI’s 4% medium-term target for the third consecutive month. Rising crude prices and broader price pressures have strengthened the case for the central bank to begin tightening policy.

JM Financial Institutional Securities, in its October MPC preview, said the RBI faces a choice between frontloading a rate hike and waiting until December. It expects a shallow rate-hike cycle to begin in October.

The brokerage said elevated crude prices and hardening yields are increasing the pressure on the RBI to act, even though domestic growth-inflation conditions alone may not warrant an immediate hike. It also pointed to the narrowing India-US yield differential and pressure on the rupee as reasons for reconsidering the timing of a rate increase.

JM Financial estimates that excess liquidity in the banking system remains at around Rs 4.8 trillion even after the RBI drained Rs 6.4 trillion through various measures. This surplus liquidity could cushion some of the impact of a rate hike on economic growth, it said.

The brokerage also highlighted deficient rainfall and depleted reservoir levels as risks to food inflation. It said rainfall was 13% below normal as of September 30, while reservoir levels were at 70.8% of full capacity against a 10-year average of 80%.OIL, INFLATION AND GLOBAL RATES IN FOCUS

Motilal Oswal Financial Services (MOFSL) has also flagged the risk of a higher-rate environment globally. Its September analysis said major central banks, including the US Federal Reserve, European Central Bank and Bank of Japan, had moved towards tighter monetary policy, pushing up borrowing costs and bond yields.

For India, MOFSL said the 10-year government bond yield had moved to around 7%, while higher US yields and elevated crude prices could limit any major decline in domestic bond yields. It expects the 10-year government bond yield to remain in the 7-7.2% range for the rest of FY27.

MOFSL expects retail inflation to rise above 6% in the third quarter of FY27 and has retained its FY27 inflation forecast at 5.1%, slightly above the RBI’s 5% projection. It said the RBI could consider raising rates if crude prices remain high and inflation expectations rise.

Under a sustained oil shock, MOFSL sees the possibility of cumulative rate hikes of 75-100 basis points in the current cycle.INFLATION TO FORCE RATE HIKE?

Vinit Bolinjkar, Head of Research at Ventura, expects the RBI to raise the repo rate by 25 basis points to 5.50%.

“Heading into the October policy, the RBI faces a genuinely finely balanced decision. A majority of economists now expect a 25-basis-point hike to 5.50% — the first since 2023 — as inflation has run above the 4% target for three straight months, partly fuelled by the surge in US bond yields and elevated crude prices,” he said.

Bolinjkar said a hike could put short-term pressure on rate-sensitive sectors such as banks, auto and real estate, but could support the rupee and ease pressure from foreign institutional investor outflows by narrowing the yield gap with the US.

For bonds, he said much of the rate hike is already priced in, making the RBI's forward guidance and tone on future rate action more important for markets.

However, not all experts expect the RBI to hike rates this week.

Sudeep Bhatt, Director-Strategy at Whiteland Corporation, expects the MPC to maintain status quo at 5.25%.

“With global headwinds and domestic inflation, we anticipate the RBI MPC will maintain a status quo on the benchmark repo rate at 5.25% during the upcoming meeting,” Bhatt said.

He said a pause would provide predictability for developers and homebuyers and allow project timelines and capital allocation plans to continue without a rate shock.

Pushpender Singh, Managing Director of JMS Group, also expects a pause.

“As we head into the October MPC meeting, the RBI faces a delicate balance act between managing domestic inflation and navigating global economic ripples. As an expert, I expect a ‘hold’ strategy to prevail, providing a sense of continuity that the market currently craves,” Singh said.

He added that high-end property buyers remain relatively less affected by rate cycles and that the luxury housing market remains resilient.advertisementWHAT A RATE HIKE COULD MEANIf the RBI raises the repo rate, banks could gradually face higher funding costs, which could feed into lending rates depending on how lenders adjust their external benchmark-linked loans.

Borrowers with floating-rate home, auto and other loans could therefore see higher EMIs or longer repayment periods if lending rates rise.

The impact could also vary across sectors. MOFSL said banks could be relatively better placed because floating-rate loans can be repriced, while NBFCs, real estate, automobiles and consumer durables could be more sensitive to higher borrowing costs.

At the same time, a rate hike could support the rupee by improving the yield differential with global markets and help the RBI deal with imported inflationary pressures.

The bigger question for markets, therefore, may not just be whether the RBI hikes rates by 25 basis points, but whether the October move marks the beginning of a longer tightening cycle.

JM Financial expects the cycle to be shallow and potentially frontloaded in October, while MOFSL has warned that a prolonged oil shock could result in a much larger cumulative increase in rates.

(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)- Ends

An engineer who swapped codes for headlines, Sonu Vivek is a product of IIMC Delhi with over three years of experience in the news room. Before joining India Today, he worked with ANI and TICE News. Born and raised in Bokaro, Sonu writes about personal finance, taxes, and stock markets. Basically, how you can make money and keep it. When he’s not simplifying budgets, he’s probably cheering for cooking or out playing some sport.