MUMBAI: Rising inflation, spike in global crude oil prices, and rate tightening by global central banks have tilted the balance toward a rate hike by the RBI’s Monetary Policy Committee (MPC) during its
bi-monthly policy review from October 5 to 7. However, economists expect the rate hike cycle to be shallow with a total 50-75 basis points rate hike during the two October and December monetary policy meetings.
At its August meeting, the RBI held the repo rate at 5.25 per cent, retaining a cautious wait and-watch stance flagging the risk that supply-side inflation could broaden.
According to SBI Research study till August 2026, the process of inflation getting generalized has already started. In Jan’26, 22 commodities explained 90 per cent of CPI’s weighted contribution. In August this number of commodities increased to 51.
A key risk pushing inflation above the RBI’s projected path is coming from the rally in oil prices. Brent has risen from $80/b to $102/barrel, well above the RBI’s FY27 crude assumptions of $95/b in
June policy and $90/b in August policy.
India’s retail inflation, based on the CPI (new base), printed at 4.82 per cent up from 4.45 per cent in July, food inflation reached a high of 5.66 per cent. Concomitantly, Core inflation (ex-food and fuel
household and transport) accelerated to 4.44 per cent from 4.16 per cent.
Elevated food prices and energy pressures could push CPI inflation above 6 per cent in 3QFY27, taking inflation beyond the RBI’s upper tolerance threshold said several economists. However, on the positive side, economic growth has remained resilient: Q1 FY27 GDP rose 7.8 per cent.
Secondly, the global economy is entering a period of higher interest rates and more expensive capital, as major central banks have started moving away from the low-interest-rate environment of the past few years.
The US Federal Reserve, European Central Bank and Bank of Japan have raised interest rates in September, while the Bank of England has kept its rate unchanged but maintained a cautious stance. China remains an exception and continues to follow a supportive monetary policy.
According to the latest Economy Macro-Cap report by Motilal Oswal Financial Services Ltd, the global shift is leading to tighter financial conditions, with higher interest rates and bond yields making borrowing more expensive.
The 10-year Indian government bond yield has moved to above 7 per cent, while higher US bond yields, elevated crude prices and RBI liquidity measures could limit any
significant fall in Indian bond yields.
“The RBI may not wait for the full broadening of inflation to become visible in 3Q data, particularly given the lag in monetary transmission. An October rate hike is therefore a meaningful possibility if crude remains elevated and inflation expectations begin to rise. Under a sustained oil-shock scenario, we see potential for 75–100bp of cumulative rate hikes in the current cycle,” said Radhika
Piplani, research analyst at Motilal Oswal Financial Services.
However, according to Apoorva Javadekar, chief economist at Shriram Finance, the case for an extended tightening cycle is weak. “Growth momentum is moderating, rainfall deficits are more damaging to rural incomes than inflation, and the oil shock itself is demand-destructive. Leveraged households and capex are particularly exposed to higher rates. We therefore expect any tightening cycle to be shallow and see little merit in using policy rates to defend the rupee,” said Javadekar.
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