RBI October meeting likely to hike repo rate
The Reserve Bank of India's Monetary Policy Committee is expected to raise the repo rate by 25 basis points to 5.50% at its October 5-7 meeting.
Markets anticipate a 25 basis point repo rate hike from the Reserve Bank of India at its October 2026 policy meeting. The RBI's six-member Monetary Policy Committee will meet from October 5 to 7, with the decision announced on October 7, against a backdrop of rising inflation and external pressures.
Retail inflation rose to 4.82% in August 2026 from 4.45% in July. Crude oil prices have stayed above $100 per barrel in recent weeks. This persistence raises the risk of inflation pressures becoming broad-based. The October meeting also coincides with the peak festive consumption period.
MPC signals shift amid external and domestic pressures
The RBI has kept the repo rate unchanged at 5.25% for the last four consecutive policy meetings. This followed a cumulative cut of 125 basis points in 2025. Economists now expect a change. Barclays economists Aastha Gudwani and Amruta Ghare expect a first rate hike on October 7, with a terminal rate seen at 5.75%.
Gaura Sen Gupta, chief economist at IDFC First Bank, said the need for a hike is driven by both domestic and external factors. SBI Research assessed the balance of risks has shifted towards a 25-basis-point repo rate hike. Most respondents expect the RBI to raise its FY27 inflation forecast from the current 5%. Estimates of the revision range from 10-20 basis points to a larger upward revision. Respondents also expect the central bank to raise its FY27 growth forecast from 6.7%. This follows GDP growth of 7.8% in the April-June quarter, which was 80 basis points above the RBI’s projection. SBI Research expects the RBI to increase its FY27 GDP growth forecast by 30 basis points and its inflation forecast by 20 basis points.
Liquidity conditions and rupee weakness add to policy tension
System liquidity remains in surplus, exceeding $4.5 trillion. This surplus has caused the weighted average call rate to hover below the repo rate. As of September 28, system liquidity was at 1.8% of Net Demand and Time Liabilities surplus, with WACR at 5.1%, below the 5.25% repo rate. The RBI is expected to continue with liquidity absorption measures. It has already used tools including foreign-exchange operations, dollar-rupee swaps, spot dollar sales, bond sales, and variable-rate reverse repos.
The Indian rupee has weakened significantly. It fell 0.5% to around 96.315 per US dollar on October 1, its lowest level in two months at that point. The rupee depreciated further towards 97 against the dollar. A recent Fed rate hike narrowed the interest-rate differential, adding pressure.
Growth remains strong, setting stage for policy normalization
India’s economy grew by nearly 8% in the April-June quarter. Bank credit growth remained strong. High-frequency indicators show that growth remains resilient in the second quarter. This robust growth supports the case for policy normalization. Stronger food inflation and a persistent crude oil shock could push producers to pass on higher input costs to consumers.
The policy stance is currently neutral, and most participants do not expect a change to that stance. Rajeev Sharan noted the strengthening arguments for a hike. "The arguments for a rate hike have gained strength, with retail inflation rising to 4.82% and expected to peak during the festive quarter," he said. Madan Sabnavis, chief economist at Bank of Baroda, was the only respondent to say the MPC is expected to keep rates unchanged. The last rate hike was in February 2023, when the policy repo rate was increased by 25 bps to 6.5%. The RBI's medium-term inflation target is 4%. If the MPC follows SBI Research’s recommendation, the repo rate would rise to 5.50%.
