RBI may hike repo rate 25 bps in October, another hike likely in December: SBI Research

The Reserve Bank of India (RBI) may raise the repo rate by 25 basis points (bps) in October and follow it up with another 25-bps hike in December as rising crude oil prices, broadening inflationary pressures and elevated global bond yields complicate the domestic policy outlook, SBI Research said in its latest Ecowrap report.

The projection marks a significant shift from expectations of a prolonged pause just a month ago. SBI Research now expects 50 bps of cumulative rate hikes by December, arguing that the RBI needs to act before temporary price pressures become entrenched. The research house said its October rate-hike call is agnostic to the August CPI inflation print, which it expects could be around 4.8-4.9%.

Oil shock raises inflation risks

The biggest immediate risk is crude oil. Prices have crossed $100 a barrel amid heightened geopolitical tensions, including developments around the Strait of Hormuz, Red Sea and Bab-el-Mandeb. SBI Research's quantile regression model suggests crude could reach $123 a barrel over the next 15 days at the 60th quantile, while an alternative model estimates an average price of $105 a barrel over the same period.

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If oil prices remain elevated, inflation readings for October and November could move towards 6.5% or higher, SBI Research said. The concern is compounded by signs that inflation is becoming more broad-based. The number of commodities accounting for 90% of CPI's weighted contribution increased from 22 in January to 53 in July, while the contribution of the top 25 commodities, excluding gold and silver, fell from 83% to 75%.

Cost pressures yet to fully pass through

The report flagged incomplete pass-through of higher input costs to final prices in sectors including crude petroleum and natural gas, beverages, pharmaceuticals and electronics. Crude petroleum and natural gas have an imported share of 31.3%, making the sector particularly vulnerable to higher global prices.

SBI Research said waiting for the entire cost pass-through to show up in CPI could mean responding only after inflation becomes more entrenched. It cited rising restaurant inflation, driven by higher onion, edible oil and LPG prices, as an example of how input-cost pressures are feeding through with a lag.

Core inflation remains relatively benign

Despite the increase in headline inflation, core inflation has remained relatively subdued. Overall CPI inflation rose 172 bps between January and July, from 2.73% to 4.45%, while core CPI increased by only 20 bps to 3.87%.

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SBI Research attributed the relatively modest rise in core inflation partly to contrasting movements in restaurant and accommodation services and personal care and miscellaneous goods and services. Restaurant inflation rose sharply as higher food and fuel costs pushed up operating expenses, while menu-cost frictions delayed the full pass-through.

Key data points

Indicator	SBI Research view / data
October repo rate call	25 bps hike
December repo rate call	Another 25 bps hike
Total expected hikes	50 bps by December
August CPI estimate	4.8–4.9%
Oct-Nov inflation risk	6.5% or higher if oil remains elevated
Crude oil price	Above $100/bbl
15-day crude forecast	Up to $123/bbl at 60th quantile
Alternative 15-day crude estimate	Average $105/bbl
Commodities driving 90% of CPI	53 in July, up from 22 in January
Top 25 commodities' CPI contribution	75% in July, down from 83% in January
Overall CPI inflation	4.45% in July, vs 2.73% in January
Core CPI inflation	3.87% in July, vs 3.67% in January
Indian 10-year G-sec yield	Above 7%
10-year yield forecast	7.15% or higher
US 10-year yield	Near 5%
US Fed September hike probability	71%, up from 61%
FCNR(B) mobilisation	$127.22 billion as of Aug 31
Total FCNR(B)+ECB+OFCB mobilisation	$136.38 billion
Expected FY27 banking funding gap	₹12.5 lakh crore
Expected system liquidity	To taper as credit demand absorbs surplus

Source: SBI Research, Ecowrap

10-year yield could move towards 7.15%

The rate outlook comes as India's benchmark 10-year government bond yield has crossed 7%. SBI Research expects yields to rise another 10-15 bps, potentially moving towards 7.15% or higher, as oil prices create imported inflation, exchange-rate pressure and uncertainty over the RBI's policy response.

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Globally, bond markets are also under pressure, with the US 10-year yield nearing 5% and the 30-year yield around 5.40%. The probability of a September US Federal Reserve rate hike has risen to 71% from 61%, SBI Research said.

RBI faces liquidity-management dilemma

The rate outlook comes alongside a large liquidity surplus generated by FCNR(B) deposit mobilisation. FCNR(B) deposits had reached $127.22 billion by August 31, while total mobilisation including ECBs and OFCBs stood at $136.38 billion. SBI Research expects the liquidity bulge to be temporary and to be absorbed as credit demand strengthens.

The research house said aggressive liquidity withdrawal could create a deficit during the traditionally stronger credit-demand quarters. Since FCNR(B) deposits are exempt from CRR, it said a CRR increase is not advisable at this juncture, leaving options such as VRRR auctions, MSS and selective retirement of RBI's short-dollar positions.

SBI Research also stressed that clear, credible and consistent RBI communication will be essential to anchor inflation expectations and preserve policy credibility. A shallow rate hike, it said, could demonstrate the central bank's agility in responding to evolving external shocks.

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