RBI may hike policy rate by 25 bps in October, December: SBI Research

SBI Research's Ecowrap report predicts the Reserve Bank of India will raise its policy rate by 25 basis points in October and again in December, driven by rising crude oil prices and widespread inflation pressures, independent of US Fed actions.

The Reserve Bank of India is likely to raise its policy rate by 25 basis points in October and another 25 basis points in December as rising crude prices and broader inflation pressures threaten to push inflation higher, SBI Research said in its latest Ecowrap report.

Rate Hike Rationale

The report said the expected rate hikes would be driven by evolving economic risks and would be independent of any possible action by the US Federal Reserve, similar to the approach taken by the RBI in 2022. “We strongly advocate a 25-bps rate hike in the upcoming October policy (followed by another in December in quick succession),” the report said.

Inflationary Pressures Detailed

The report further added that crude oil prices have recently crossed USD 100 a barrel amid heightened geopolitical uncertainty. Its quantile regression model estimates that crude could reach USD 123 a barrel over the next 15 days at the 60th percentile, while an alternative model estimates an average price of USD 105 a barrel over the same period. SBI Research clarified that higher-quantile estimates represent worst-case stress rather than a baseline expectation.

The research also flagged signs that inflation is becoming more widespread. According to its analysis, the number of commodities accounting for 90 per cent of CPI's weighted contribution rose from 22 in January 2026 to 53 in July. It said sectors such as crude petroleum and natural gas, beverages, pharmaceuticals and electronics are seeing input costs rise faster than output prices, leaving scope for greater pass-through to consumer prices.

“Waiting for the entire pass-through to materialise in CPI would risk responding after inflation has become more entrenched,” SBI Research said, adding that this provides a case for an October rate hike.

Impact on Bonds and Liquidity

The report also expects pressure on Indian government bond yields to continue. With the benchmark 10-year yield moving above 7 per cent, SBI Research expects it to rise another 10-15 basis points and move towards 7.15 per cent or higher, as oil prices add to imported inflation, exchange-rate pressure and uncertainty.

At the same time, SBI Research said the current surplus liquidity in the banking system is likely to be temporary and could taper over the next three to four months. It expects liquidity to be absorbed as credit demand strengthens and seasonal demand rises during the festive period. (ANI)

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