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The Reserve Bank of India is seen beginning a rate-hike cycle that could take the repo rate to 6 per cent by the end of FY27, as rising inflation, elevated global yields and resilient domestic growth strengthen the case for tighter monetary policy, according to research reports by Union Bank of India and ICICI Bank.
The reports, released ahead of the second day of the RBI Monetary Policy Committee's October 5-7 meeting, broadly converge on a cumulative 75-basis-point tightening cycle, while differing on the policy stance and the risks that could alter the pace of rate increases. Union Bank expects the MPC to raise the repo rate by a quarter percentage point to 5.50 per cent in the current review and shift towards a calibrated tightening stance. We see the October MPC beginning a rate-hike cycle, with 75 bps as our baseline and repo reaching 6% by end-FY27, it said. ICICI Bank also points to a 75-bps cycle as the base case, saying this would keep real interest rates within the 1.4-1.9 per cent range. However, it favours the MPC remaining data-dependent with a neutral stance given global uncertainty. It said the cycle could be limited to 50 bps if global energy prices fall sharply. The reports point to inflation as a key reason for the expected tightening. ICICI Bank has raised its FY27 CPI inflation forecast to 5.1 per cent from 5 per cent, while saying inflation is becoming more broad-based, with core inflation also moving higher. It expects CPI inflation to peak at around 5.9 per cent in the third quarter of FY27. Union Bank has a more elevated inflation outlook, projecting FY27 CPI inflation at around 5.4 per cent and expecting inflation to remain above 6 per cent during parts of the second half of FY27. It said deficient monsoon conditions and crude prices around USD 100 a barrel are adding to inflationary pressures. Liquidity management is another focus. ICICI Bank said, Domestic and external developments warrant policy tightening, noting that core liquidity had risen sharply following foreign-currency inflows and that further absorption would be required. It expects the RBI to continue using a mix of open market and foreign-exchange operations. The size of the rate cycle will depend on oil prices, global monetary policy and monsoon conditions. Union Bank estimates that easing geopolitical tensions could limit tightening to 50-75 bps, while a prolonged oil shock could push the cycle towards 100-125 bps. (ANI)
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