RBI Expected to Raise Repo Rate to 5.50% in October as Inflation Pressures Build

The Reserve Bank of India is increasingly expected to raise interest rates in October, as inflation spreads beyond a handful of categories and pressure on the rupee adds another complication for policymakers.

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A Reuters poll of economists points to a 25-basis-point increase in the repo rate to 5.50% at the RBI’s October 5-7 meeting. If that happens, it would be the central bank’s first rate hike since February 2023.

And October may not be the end of it. A slim majority of economists surveyed also expect another increase by December, signalling a shift in expectations after months when the RBI was largely seen keeping rates unchanged.

Inflation Is Becoming Harder to Ignore

The change in expectations comes as India’s inflation picture becomes less comfortable.

Consumer inflation rose to 4.82% in August, moving above the RBI’s 4% medium-term target for a third consecutive month. Higher energy and food costs were major contributors to the increase.

But it is the spread of price pressures across the economy that is drawing greater attention.

Minutes from the RBI’s August meeting showed that several policymakers, including Governor Sanjay Malhotra, were open to raising rates if inflation became more broad-based.

That condition now appears to be moving closer.

Abhishek Upadhyay, co-head of economics and fixed income research at ICICI Securities Primary Dealership, said inflation for the current quarter was running about 20 basis points above the RBI’s forecast and that the increase was fairly widespread.

He expects the central bank to begin raising rates in October.

Nearly 60% of Economists Expect an October Hike

Of the 61 economists surveyed by Reuters between September 18 and September 28, 35 nearly 60% expect the RBI to increase the repo rate by 25 basis points to 5.50%.

Expectations for what happens after October have also changed.

Among 53 economists who offered a view on the year-end rate, 29 expect at least one more 25-basis-point increase by December.

That is a notable change from the previous month’s Reuters survey, when the median forecast suggested the RBI would leave rates untouched until March next year.

Indranil Pan, chief economist at Yes Bank, said the RBI may need to recognise that it is slightly behind the curve, particularly after the US Federal Reserve raised interest rates.

A Weaker Rupee Adds to the Pressure

Inflation is not the RBI’s only concern.

The rupee has weakened by around 6% against the US dollar this year, adding another dimension to the October decision.

The RBI has spent several years managing a gradual depreciation in the currency, but higher interest rates elsewhere are making that task more challenging.

Major central banks have either started raising rates or are considering doing so as higher energy prices feed into inflation. The US Federal Reserve raised rates earlier in September and is expected to deliver at least one more increase.

That global shift means India’s interest-rate decision is taking place in a considerably less forgiving environment.

Economists See a Relatively Shallow Rate-Hike Cycle

Even if the RBI begins raising rates in October, economists are not expecting an aggressive tightening cycle.

The median forecasts in the Reuters poll point to the repo rate reaching 5.75% and remaining there until at least the middle of 2028.

If that view proves correct, the coming cycle would be among the shallowest RBI rate-hiking phases in at least a decade.

For now, the October meeting has taken on greater significance than appeared likely only a few months ago. Inflation is running above target, price pressures are becoming more widespread, the rupee remains under strain and global interest rates are moving higher.

The question facing the RBI is no longer simply whether those pressures warrant a response, but whether October is the moment to begin one.