Pressure mounts on RBI for October rate hike, says Yes Bank report

The RBI faces increased pressure for an October interest rate hike after the US Fed's hawkish move narrowed the India-US rate differential, a Yes Bank report said. The decision will also weigh domestic growth, inflation, and liquidity absorption.

Representative image (Photo/ANI)

RBI Rate Hike Pressure Mounts

The Reserve Bank of India may face increased pressure to begin raising interest rates as early as October after the US Federal Reserve adopted a hawkish stance and the India-US interest rate differential narrowed further, Yes Bank said in a research report.

The probability of an RBI rate hike in October has increased, although the central bank’s decision will continue to depend on domestic growth and inflation dynamics, the report said. It added that firm global crude prices, higher headline CPI in August and a rise in core inflation could provide the basis for an RBI move.

However, the effectiveness of any rate hike could depend on the RBI’s ability to absorb surplus liquidity, with the weighted average call rate (WACR) currently at 5.05 per cent, Yes Bank said. The bank said it would watch the success of the RBI’s liquidity absorption measures before taking a firmer view on the likely October repo rate action.

Hawkish US Fed Stance

The comments came after the US Federal Reserve raised its policy rate by 25 basis points to a target range of 3.75-4 per cent in a unanimous 12-0 decision. The Fed also revised its 2026 inflation and growth projections higher, while lowering its unemployment forecast.

The bank in research report said that it expects another 25-basis-point rate hike by the Fed in December 2026, citing the central bank’s dot plot and its assessment that inflation remains elevated. The report said the hawkish shift has changed market expectations, with investors now pricing in another US rate hike this year.

The Fed raised its 2026 GDP growth projection to 2.3 per cent from 2.2 per cent earlier, while its unemployment forecast was lowered to 4.1 per cent from 4.3 per cent. Its 2026 PCE inflation projection was raised to 3.7 per cent from 3.6 per cent, while core PCE inflation was revised to 3.4 per cent from 3.3 per cent.

Yes Bank said resilient US labour market conditions are giving the Fed room to focus on inflation. Nonfarm payrolls rose by 162,000 in August, while job openings increased to 7.27 million in July.

Impact on Indian Markets

For India, the report said the narrowing interest rate differential is adding pressure on the domestic currency market, while foreign portfolio investors continue to see net outflows. (ANI)

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