Fed Rate Hike Adds to RBI Tightening Expectations Ahead of October Policy Review

The US Federal Reserve’s first interest-rate increase in more than three years has added another factor for the Reserve Bank of India to weigh when its Monetary Policy Committee meets in October. 

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The Fed raised rates by 25 basis points on September 16, citing inflationary pressures. The move, its first increase since July 2023, comes at a time when expectations of monetary tightening in India have also been building. 

India’s repo rate currently stands at 5.25%. A recent Moneycontrol poll indicated that it could reach at least 5.75% by the end of FY27, although the timing and extent of any increase will depend on how inflation, crude oil prices and the rupee move over the coming months. 

Domestic inflation has already begun to pick up. Retail inflation rose to 4.82% in August from 4.45% in July. While that remains within the RBI’s 2-6% tolerance band, the outlook has become more complicated as Brent crude stays above $100 a barrel. 

Supply disruptions around the Strait of Hormuz and the wider Middle East have added to concerns over oil prices and their possible effect on inflation. 

Bond yields and rupee add to the policy equation 

The narrowing gap between US and Indian bond yields has also moved into focus. 

The benchmark 10-year US Treasury yield reached the 5% level earlier this week, while India’s 10-year government bond yield touched 7% earlier this month. A smaller yield differential can affect the relative appeal of Indian assets at a time when investors have access to higher returns from US securities. 

Pressure has also been visible in the currency market. The rupee weakened beyond ₹96 against the dollar in early trade for the first time since July 27, touching ₹96.11 before recovering part of the decline to trade at ₹95.81. 

The RBI has been intervening to contain sharp moves in the currency, but crude oil remaining above $100 per barrel has added to the pressure. 

Expectations build around October MPC 

The RBI last raised interest rates in May 2023. It subsequently maintained a prolonged pause until February 2025. 

Economists cited in the Moneycontrol report now see a possibility that the next tightening cycle could begin with a 25-basis-point increase, potentially taking the repo rate to 5.50% in October. 

That outcome, however, is not certain. The decision is expected to depend on whether headline and core inflation remain elevated, how long crude oil stays at current levels and the extent of pressure on the rupee. 

Even among economists expecting higher rates, the broader view cited in the report is for a relatively measured tightening cycle rather than a steep series of increases. 

One estimate puts the possible cumulative increase at 50-75 basis points. India’s economic growth provides some room for such a move, with GDP having expanded 7.8% in the first quarter. 

The risk to that relatively shallow path would come from inflation proving more persistent than expected, particularly if elevated crude prices and currency weakness continue. 

For the October MPC meeting, the Fed’s latest move is therefore one part of a wider set of considerations. Inflation at home, oil above $100, the rupee’s weakness and movements in bond yields will all feed into the RBI’s decision on whether the current 5.25% repo rate needs to move higher.