RBI rate hike in December: SBI now expects just 25 bps despite inflation crossing 6%

SBI Research has revised its December RBI rate hike forecast to 25 basis points from 50 bps, despite retail inflation breaching the central bank's 6% tolerance ceiling. The revised outlook reflects improving rupee stability, foreign capital inflows, softer crude oil prices and expectations of easing global bond yields.

In its latest Ecowrap report dated November 12, SBI Research said the balance of probabilities had shifted decisively towards a smaller rate increase at the Reserve Bank of India's December Monetary Policy Committee (MPC) meeting.

The revision comes after India's consumer price index (CPI) inflation climbed to a two-year high of 6.09% in October, exceeding the RBI's upper tolerance limit for the first time under the new CPI series.

“When facts change, I change my mind. What do you do sir?” the SBI Research report stated, as it revised its December rate hike forecast from 50 basis points to 25 basis points.

Earlier, the research team had outlined two possibilities: an aggressive 50-bps hike or a 25-bps repo rate increase accompanied by another 25-bps tightening through widening the interest rate corridor.

However, recent domestic and international developments have strengthened the case for a more measured response.

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Four factors supporting a smaller rate hike

SBI identified four developments behind its revised forecast.

First, the RBI's efforts to stabilise the rupee and ease liquidity pressures have yielded results. The currency recovered below ₹94 against the dollar before weakening again, while overnight money market rates moderated.

Second, improving foreign capital flows could reduce pressure on the currency. SBI noted foreign institutional investment inflows of approximately $7.68 billion since November 4, alongside a 0.7% appreciation in the rupee.

Third, easing geopolitical tensions have improved the crude oil outlook. Brent crude prices have declined approximately 11% following the US elections, potentially reducing India's imported inflation pressures.

Fourth, SBI expects US Treasury yields to soften, with the benchmark 10-year yield potentially moving towards 4.75%. Indian 10-year government bond yields could settle around 6.75–7%, with a downward bias.

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Inflation remains a major concern

Despite the improving external environment, domestic inflation pressures remain elevated.

Food and beverages inflation reached 8.51% in October, while consumer food price inflation climbed to 8.94%, compared with 7.74% in September.

Onion prices surged 116.22%, followed by garlic at 60.74%, ginger at 48.32% and lemons at 47.3%.

Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, expects inflation to remain above 6% over the next few readings, citing adverse base effects, higher food prices and commodity cost pressures.

Madan Sabnavis, Chief Economist at Bank of Baroda, believes the RBI could consider a 25–50 bps hike in December as inflation becomes increasingly broad-based.

Could the repo rate peak at 5.75%?

SBI Research expects inflation to reach approximately 6.3% in November before moderating.

Importantly, it now assigns equal probabilities to the terminal repo rate settling at 6% or a lower 5.75%.

The report also argues against another rate hike in February 2027, favouring a data-dependent approach after December.

For borrowers, the revised forecast suggests a potentially smaller increase in lending rates than previously anticipated, although actual borrowing costs will depend on the RBI's decision and banks' transmission of policy changes.

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