RBI may end rate-cut cycle with first hike since February 2023

Representative image

MUMBAI: The era of falling interest rates that began in February 2025 is likely to end this week, with bankers and economists expecting RBI to raise the repo rate by 25 basis points.

The last increase came in February 2023, ending a tightening cycle that began after Russia's invasion of Ukraine.In February 2025, RBI cut rates by 25 basis points after a five-year pause, followed by 25bp in April, 50bp in June and 25bp in December, taking the repo rate to 5.25%.It has held off on tightening despite inflation risks from the West Asia conflict and weaker farm output, betting that structural changes and stronger corporate and bank balance sheets could absorb margin pressure.

SBI chairman CS Setty told TOI last week: "Our in-house view is that there could be a repo rate hike, but we do not expect it to materially impact credit growth," highlighting the resilience of the economy.

The impact may be felt faster in bank lending rates than in bonds, given the liquidity created by the FCNR(B) flows, which brought in $127 billion. That could push some borrowers towards the bond market. "On any shift towards bonds, much will depend on how market rates evolve, as bond yields have also moved up.

Corporates today can move more seamlessly between bank borrowing and market funding, depending on relative pricing," Setty said.Yes Bank chief economist Indranil Pan expects inflation to broaden, with Q2 inflation exceeding the RBI's 4.7% forecast and approaching 6% as higher input costs reach consumers. He sees resilient growth giving RBI room to tighten despite geopolitical risks, higher oil prices and rupee weakness, but expects the stance to remain neutral.

"Given that there are signs of generalisation of price pressures, we expect RBI to start its hiking cycle in October by 25 bps," Pan said.IndusInd Bank chief economist Gaurav Kapur puts the probability of a 25-basis-point October hike at 90%. Aastha Gudwani, India chief economist, expects the first hike on October 7, citing higher global oil prices and resilient domestic growth. "We expect terminal rate at 5.75%, with front-loaded hikes in Q4.

Liquidity and monetary tightening to co-exist," she said.Axis Capital chief economist Prateek Ancha expects a larger move. "Fed's latest rate hike and dot plot strengthen the case for 50bp of RBI tightening in CY26, split between October and December."We expect the overall hiking cycle to be limited to 75bp. In the near term, the RBI's focus is likely to remain on draining surplus liquidity and bringing overnight rates, currently 45bp below the policy rate, back in line with the policy rate."