RBI May Hike Repo Rate by 50 BPS by December Amid Inflation Risks

The Reserve Bank of India could raise its benchmark repo rate by a cumulative 50 basis points by the end of December 2026, according to analyst projections, as inflation risks and excess liquidity in the banking system complicate the monetary-policy outlook.

The projected path involves a 25-basis-point increase in October followed by another 25-basis-point hike in December, which would take the repo rate from the current 5.25% to 6%. These are analyst expectations rather than an announced RBI decision.

RATE OUTLOOK
5.25% — Current repo rate
+25 bps — Possible October hike
+25 bps — Possible December hike
6.00% — Projected year-end rate if both hikes occur

Inflation is one of the main factors behind expectations of tighter monetary policy. India's retail inflation increased to 4.82% in August from 4.45% in July, while economists cited in the report expect September inflation to move closer to 5%.

Higher crude oil prices could add further pressure. Systematix Group said inflation could exceed the RBI's earlier projections if crude remains in the $90-$110 per barrel range, as higher energy costs can increase producer expenses and eventually feed through to consumer prices.

The banking system's large liquidity surplus is another issue being watched. HSBC estimates that inflows into Foreign Currency Non-Resident (Bank), or FCNR(B), accounts have contributed to a core liquidity surplus of around ₹15 trillion. The bank cautioned that prolonged excess liquidity could add to inflationary pressures and create financial-stability risks.

LIQUIDITY SNAPSHOT
~₹15 trillion — Core liquidity surplus estimated by HSBC
~₹2.5 lakh crore — Liquidity already absorbed
~₹4 lakh crore — Additional withdrawal analysts say could occur

The RBI has already been using tools including open market operations and variable rate reverse repo auctions to absorb excess funds from the banking system. Analysts cited in the report expect these measures to intensify, potentially withdrawing another ₹4 lakh crore in addition to nearly ₹2.5 lakh crore already absorbed.

At its August policy meeting, the MPC unanimously kept the repo rate unchanged at 5.25% and retained its neutral stance, leaving future decisions dependent on incoming inflation and growth data.

The coming policy meetings will therefore be closely watched for whether the RBI moves from its current pause toward monetary tightening. For now, the prospect of a 50-basis-point increase remains a forecast by analysts, not a confirmed RBI policy decision.