RBI Repo Rate Increase: Central Bank Poised to Conclude Rate-Cutting Cycle with First Hike Since February 2023
MUMBAI: The Reserve Bank of India (RBI) is expected to raise the repo rate by 25 basis points this week, marking the end of a period of declining interest rates that began in February 2025. The last rate increase occurred in February 2023, concluding a tightening cycle initiated after Russia’s invasion of Ukraine. Following a series of cuts, the repo rate currently stands at 5.25%.
Bankers and economists have noted that the RBI has refrained from tightening despite inflation risks stemming from geopolitical tensions and weaker agricultural output. SBI chairman CS Setty indicated that while a repo rate hike is anticipated, it is not expected to significantly impact credit growth, reflecting the economy’s resilience.
Impact on Lending Rates
The anticipated rate hike may influence bank lending rates more swiftly than bond markets, aided by liquidity from FCNR(B) flows, which have brought in $127 billion. Setty mentioned that borrowers might shift towards the bond market, depending on how market rates evolve. Corporates today can navigate between bank borrowing and market funding based on relative pricing.
Yes Bank chief economist Indranil Pan predicts that inflation will rise, with Q2 inflation likely to exceed the RBI’s forecast of 4.7% and approach 6%. He believes that resilient growth will provide the RBI with the flexibility to tighten monetary policy despite external risks, including rising oil prices and currency depreciation. Pan anticipates the RBI will initiate its hiking cycle in October with a 25 basis point increase.
Expectations from Economists
IndusInd Bank chief economist Gaurav Kapur assigns a 90% probability to a 25-basis-point hike in October. Aastha Gudwani, India chief economist, also expects the first hike on October 7, citing rising global oil prices and robust domestic growth. She forecasts a terminal rate of 5.75% with front-loaded hikes in the fourth quarter.
Axis Capital chief economist Prateek Ancha suggests a more aggressive approach, predicting a potential 50 basis point tightening split between October and December. He estimates the overall hiking cycle will be limited to 75 basis points, with the RBI focusing on reducing surplus liquidity and aligning overnight rates with the policy rate, which currently sits 45 basis points below the target.
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