RBI may start 75 bps rate hike cycle in October: Union Bank report

The RBI may begin a 75 basis points rate hike cycle in October as inflation is set to remain above 6% in H2-FY27, says a Union Bank of India report. The projection cites prolonged supply shocks and rising energy costs for monetary tightening.

RBI Rate Hike Cycle on the Horizon

The Reserve Bank of India (RBI) may begin a rate hike cycle totalling 75 basis points in October as prolonged supply shocks spread across the inflation basket, with retail inflation expected to remain above 6 per cent throughout the second half of FY27, according to a Union Bank of India research report.

Ahead of the RBI’s monetary policy announcement later today, the report dated October 6 said rising energy costs, higher global semiconductor prices and El Niño-related supply disruptions were broadening price pressures, strengthening the case for monetary tightening. “This warrants attention and makes case for start of a 75bps rate hike cycle by the RBI-led MPC in October,” the report said. The projection refers to the cumulative increase over a rate hike cycle. The report did not specify the size of the increase expected at the October meeting.

Inflation Projections and Drivers

The bank’s research team projected Consumer Price Index (CPI)-based inflation at 5.4 per cent for FY27, above the Monetary Policy Committee’s (MPC) forecast of 5 per cent. It expects inflation to peak in the third quarter, but remain elevated beyond the current financial year. “On balance, we believe that CPI will peak out in Q3FY27 yet stay above 6 per cent (upper end of inflation target range of 4 +/- 2 per cent) consistently during H2-FY27,” it said. Inflation pressures are also likely to persist in the first half of FY28, the report added.

Focus on Food Inflation

Food prices are expected to be a major driver, with food inflation projected to exceed 7 per cent in FY27, compared with 0.2 per cent in FY26. The report flagged persistent pressures in cereals, pulses, sugar and edible oils, suggesting that the rise extends beyond volatile vegetable prices. A 13 per cent monsoon rainfall deficit and lower reservoir levels could weigh on the upcoming rabi crop, prolonging pressure on cereal prices. Reservoir levels stood at 72 per cent, against 92 per cent a year earlier, according to the report.

Impact of Commodity Costs and Core Inflation

Meanwhile, elevated commodity costs are increasingly feeding into prices of goods and services. The report estimated that commodities accounted for around 55 per cent of the rise in headline inflation between January and August. “Headline CPI has gone up by 209 basis points between Jan’26 and Aug’26, of which almost 55 per cent, 116 bps explained by spike in commodity prices,” it said.

Core inflation, which excludes food and fuel, rose from 3.4 per cent in January to 4.44 per cent in August. The research team projected it at 4.3 per cent for FY27, against 4.1 per cent in FY26. The report warned that higher input costs could continue passing into consumer prices as resilient domestic growth strengthens businesses’ pricing power. With crude oil hovering around USD 100 per barrel and strong demand adding to supply-side pressures, it expects inflation to remain a key concern for the MPC. (ANI)

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