Repo Rate Likely To Increase Again As Inflation Picks Up

India's central bank will likely raise interest rates at successive meetings into next year as broadening price pressures push it deeper into a global tightening cycle.

A growing number of economists, including those at Goldman Sachs Group Inc., Standard Chartered Plc., Deutsche Bank AG and Morgan Stanley & Co. are predicting a follow-up 25-basis-point increase at the Reserve Bank's next decision on December 4. Some see a further half-point of tightening in the first half of 2027, taking the policy rate to a two-year high of 6.25%, from 5.5% now.

That would put India's benchmark rate among the highest in Asia, underscoring how quickly the inflation outlook has deteriorated for a central bank that was still cutting rates less than a year ago.

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Expectations for further hikes hardened Wednesday after the RBI delivered its first rate increase in nearly four years and changed its policy stance to "calibrated tightening," pointing to some early evidence that inflation was becoming broad-based.

Goldman's Santanu Sengupta said the investment bank's measure of the RBI's policy tone showed a "material increase in the hawkishness" of its communication compared with August. He expects at least another 75 basis points of hikes, citing "growth remaining resilient, price pressures getting broad-based and El Nino-related food inflation risks likely to intensify in 2027."

The higher terminal-rate forecasts reflect concern that inflation may prove more persistent as the Middle East conflict pushes up energy costs and weak monsoons threaten food prices. A rupee trading near a record low at 96.76 adds another potential source of imported inflation, particularly as oil prices remain high. India is the world's third-biggest oil importer.

RBI surveys released Wednesday added to those worries, showing households expect inflation to accelerate sharply in coming months.

Governor Sanjay Malhotra didn't sound worried about the rupee's level on Wednesday though he did say that the currency may be undervalued, while adding "markets can be quite irrational in the short run." He reiterated that the RBI's focus is on curbing excessive volatility rather than steering it toward a particular level.

For now, strong growth gives the RBI room to respond. The economy expanded 7.8% in the April-June quarter, beating the central bank's forecast. 

"The broadening of inflationary pressures alongside healthy growth momentum as reflected in credit growth warrants further rate hikes," according to Upasana Chachra, chief India economist for Morgan Stanley. "These would help normalize real rates, contain second-round inflation risks, preserve inflation expectations, and support external stability."

Citigroup Inc.'s Samiran Chakraborty also now sees a greater likelihood of 75 basis points of tightening.

The RBI has nevertheless left itself considerable flexibility over how far to go. Malhotra described Wednesday's new stance as a "milder" form of tightening and said the duration and extent of the rate-hike cycle would depend on how inflation and growth evolve.

HSBC's Pranjul Bhandari cautioned against reading the change as a commitment to further rate increases. She expects a follow-up hike in December and a likely prolonged pause thereafter.

"The RBI hasn't signed up for a specific quantum of hikes; it can hike or stay on hold in every meeting," she said, pointing to the RBI's experience in 2018. The central bank adopted "calibrated tightening" that October after two hikes earlier in the year, but never raised rates again before eventually reversing course.

Others who do not expect sharp hikes after December include Barclays' Aastha Gudwani and economists at ICRA.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)