First hike in over 3 years may not be last; repo rate can rise by another 75 basis points

THE 25 basis points hike in key policy rate, the first in more than three years, may not be the last. A shift in the monetary stance from ‘neutral’ to ‘calibrated tightening’ is a clear warning that the central bank will tighten the screws if inflationary pressures refuse to ease. Bankers and economists are now expecting another 50-75 basis points hike in the policy rate in the coming reviews.

In other words, the RBI is likely to tighten the monetary policy with a series of rate hikes if the situation on the price front doesn’t improve in the coming months. This means interest rates on loans will increase further, which in turn can dampen  the demand conditions in the economy.

“It (MPC) underscored that given the current conditions, rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook,” RBI Governor Sanjay Malhotra said after the MPC meeting.

With borrowing costs already elevated, another rate hike would exert additional pressure on households, businesses and an economy trying to sustain momentum in a challenging external environment.

The RBI’s message leaves little room for complacency. By signalling further tightening, the central bank has effectively chosen to prioritise inflation control over the immediate concerns of growth and credit demand. The consequences could be particularly punishing for consumers and businesses carrying existing debt, as higher interest rates translate into steeper EMIs, costlier working capital and weaker investment. If the MPC follows through on its hawkish stance, the next round of tightening could expose just how much economic pain the RBI is willing to tolerate in its battle to bring inflation under control.

Malhotra said the duration and extent of the rate hike cycle would be contingent on the actual growth-inflation developments and outlook, especially that of underlying inflation, the extent of broadening of price pressures and second round effects of the supply shock, as also the impact of demand impulses. The MPC observation clearly indicates that another rate hike might be in the offing in the December policy review, depending on the economic conditions, analysts said in initial reactions.

HDFC Bank economists expect the RBI to hike rates by another 50-75 bps over the coming meetings (expect back-to-back increases in consecutive meetings instead of a staggered approach). “The need for a more aggressive rate hike cycle (greater than 100-125bps) hinges on: how the West Asia conflict progresses from here on; how durable and strong is the second order impact of inputs costs increases on retail inflation; evolution of El Nino conditions and impact on winter crop and finally and how growth and demand impulses hold up in the face of global volatility and rate increases,” the bank said.

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“Given these factors, while a longer and higher rate hike cycle cannot be ruled out completely at this stage, we see it as a lower probability event,” it said.

While ICRA’s baseline GDP growth projection (+7.1 per cent) for FY2027 is in line with the MPC, it believes that there are risks to the outlook arising from deficient monsoon rainfall, impact of rising global energy prices on corporate profits, and an adverse base owing to GST rate cuts in September 2025.

ICRA’s baseline estimate pencils in the CPI inflation at 5.0 per cent in FY2027, lower than the MPC’s forecast. However, elevated crude oil prices could push inflation to 5.3-5.5 per cent, with the GDP growth moderating to 6.8 per cent in the fiscal. “At present, we expect another rate hike of 25 bps in the December 2026 meeting, and a pause thereafter, unless there are sizeable negative surprises on the inflation front,” ICRA said.

“Our estimates suggest that headline inflation will remain above 5.5 per cent YoY for three consecutive quarters starting in Q3 FY27, significantly above the RBI’s medium-term target of 4 per cent YoY. As inflation accelerates, real policy rates are likely to turn negative, necessitating a recalibration of monetary policy,” UBS Chief India Economist Tanvee Gupta Jain said. “We expect a cumulative 50-75 bps rate hike cycle, with another 25bps hike likely in the December policy.”

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Namrata Mittal, Chief Economist, SBI Funds Management, expects another cumulative 75 bps of hikes through the cycle, potentially taking the repo rate to 6.0 per cent, though she highlights that the global environment remains highly fluid.

Malhotra further observed that in light of available data, it is clear that inflation and its outlook are not benign as they were last year, with headline CPI inflation expected to average almost 5.8 per cent in the next three quarters and core inflation projected at 4.4 per cent this financial year. “In this milieu, recalibrating the policy rate is imperative,” he said.