Monday, 05 Oct, 2026
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A 25-basis-point hike in October looks likely, reflecting stronger growth and renewed inflation risks. The bigger signal will be whether the RBI keeps December in play—and treats 6 per cent inflation as a ceiling or a waypoint
The Reserve Bank of India is increasingly being pushed towards a rate hike by an inflation problem it did not create: an oil shock amplified by renewed West Asia tensions, a patchy monsoon and firmer underlying price pressures.
A 25-basis-point increase in the repo rate to 5.50 per cent on October 7 now looks the most likely outcome. Twenty of the 21 economists and bank executives polled by the Economic Times expect a hike; only one expects the RBI to hold at 5.25 per cent, where the rate has remained since December last year after a 25-basis-point cut. The last increase was in February 2023, when the repo rate was raised by 25 basis points to 6.50 per cent.
The move would reverse the easing cycle that began in 2025. If crude stays above $100 a barrel, markets broadly expect another 25-basis-point increase in December. Goldman Sachs, which had earlier expected hikes in December 2026 and February 2027, has now brought forward its call to October and December, while warning of a potentially longer tightening cycle.
The policy debate, however, is less about whether the RBI can raise rates than how far it will have to go.
Oil is the immediate pressure point. Brent averaged about $91 a barrel in August, crossed $100 in early September and reached around $113 on September 9 as supply disruptions intensified. It ended September near $103, sharply above the RBI’s FY27 assumption of $85 and the roughly $90 level underpinning its August policy assessment.
For India, higher crude can raise petrol and diesel prices, transport and input costs and, eventually, consumer prices. The greater concern is the second-round effect — whether an initial energy shock spreads through goods, wages and services.
The inflation cushion is already narrowing. The RBI has projected FY27 retail inflation at an average of 5 per cent and, in August, forecast 4.7 per cent for the September quarter and 5.9 per cent for December. The central bank targets 4 per cent, with a tolerance band of 2-6 per cent.
Private forecasts are less benign. IDFC First Bank expects December-quarter inflation at 6.1 per cent; Bandhan AMC sees it above 6 per cent. Canara Bank chief economist Madhavan Kutty G expects third-quarter inflation to peak at 6.2-6.3 per cent if geopolitics and crude prices remain on their current trajectory.
Nor is the pressure confined to fuel. Food inflation accelerated in the three months to August, while weak monsoons, soil moisture and reservoir levels pose risks to rabi sowing and farm output. Core inflation momentum has strengthened, with services inflation gaining pace. Auto makers have announced price increases and white-goods manufacturers are expected to pass higher input costs to consumers.
The August MPC minutes had already signalled concern over the inflation trajectory and possible second-round effects. Since then, the West Asia conflict has intensified and commodity prices have risen.
Yet the case for a prolonged tightening cycle is far less clear.
Bank of Baroda chief economist Madan Sabnavis expects the RBI eventually to take the repo rate to 6 per cent, but argues that the current macroeconomic risks are broadly the same as in August. A hike could dent festival spending, while sticky deposit-side transmission remains a constraint. Other economists expect a shallower cycle if growth moderates and higher rates begin to weigh on leveraged households and capital expenditure.
Growth gives the RBI some room to tighten. June-quarter GDP expanded 7.8 per cent, 80 basis points above its forecast. High-frequency indicators for July-August have moderated, but Barclays says the broader growth narrative remains robust.
The global backdrop adds pressure. The US Federal Reserve and European Central Bank have moved towards tighter policy after the 2025 rate-cut cycle. The Fed raised rates in September and is expected to do so again in October; Japan has also tightened.
The RBI need not follow the Fed mechanically. Its decisions will remain anchored in domestic inflation, growth, liquidity and financial stability. But the narrowing India-US 10-year yield differential — now 189 basis points, with yields at 7.21 per cent and 5.32 per cent respectively — makes the external constraint harder to ignore.
A 25-basis-point October hike is therefore increasingly the base case, with December the next likely move if oil stays above $100. Beyond that, the forecasts diverge: Goldman Sachs sees a more extended cycle, while other economists expect tightening to remain shallow.
The variable that will decide between these paths is crude. If Brent retreats, the RBI could stop after one or two hikes. If it remains above $100, the central bank may have to tolerate weaker growth to prevent an external oil shock from becoming a domestic inflation problem.
The October move, then, is likely to be 25 basis points. The real policy signal will be how firmly the RBI leaves the door open for December—and whether it sees 6 per cent as a ceiling or merely a waypoint.
