RBI may hike repo rate by 50 bps by December amid inflation risks

The Monetary Policy Committee could raise the repo rate by 25 basis points each in October and December, taking it to 6% by the end of 2026, a report mentioned.

In Short

• RBI may hike repo rate twice by December 2026, say experts
• Inflation rose to 4.82% in August, may near 5% in September
• High crude prices could push inflation above forecasts

The Reserve Bank of India (RBI) may raise its benchmark repo rate twice by the end of December 2026, as rising inflation risks and excess liquidity in the banking system put pressure on monetary policy.

According to analysts cited by The Hindu, the Monetary Policy Committee (MPC) could raise the repo rate by 25 basis points each in October and December, taking it to 6% by the end of 2026. Here it must be mentioned that one basis point is one-hundredth of a percentage point.

INFLATION REMAINS A KEY CONCERN

The expected rate hikes come at a time when inflation is showing signs of picking up.

India's retail inflation rose to 4.82% in August 2026 from 4.45% in July. Economists expect inflation in September to move closer to 5%.

Higher crude oil prices could add to these pressures. Systematix Group said inflation could exceed the RBI's earlier projections if crude prices remain in the $90-$110 per barrel range, the report mentioned.

The brokerage said higher crude prices could push up producer costs, which may then feed into prices paid by consumers.

It also pointed out that the current 5.25% repo rate would mean a negative real policy rate if inflation stays elevated, keeping borrowing conditions relatively easy.

BANKING SYSTEM HAS SURPLUS LIQUIDITY

Another factor that could influence the RBI's decision is the large amount of liquidity in the banking system.

According to HSBC, foreign currency inflows, particularly through the special non-resident deposit scheme, have contributed significantly to the surplus.

HSBC estimates that Foreign Currency Non-Resident (Bank) account or FCNR(B) inflows have created a core liquidity surplus of around Rs 15 trillion, according to the report.

The bank said excess liquidity could become inflationary and may also create financial stability risks if banks become too dependent on abundant funds.

RBI MAY STEP UP LIQUIDITY ABSORPTION

The RBI has already taken steps to reduce the surplus liquidity in the banking system.

These include open market operations (OMOs) and variable rate reverse repo (VRRR) auctions, which allow the central bank to absorb excess funds from banks.

Analysts expect the RBI to step up these measures in the coming months. Through VRRR operations and other tools, the central bank could withdraw another Rs 4 lakh crore of liquidity, over and above the nearly Rs 2.5 lakh crore already absorbed.

For now, the expected policy path points towards a gradual tightening of monetary conditions, with inflation and liquidity likely to remain key factors in the RBI's decisions through the end of 2026.

- Ends