RBI may hike repo rate by 75-100 bps in current cycle as inflation persists- SBI Capital flags December hike risk
The Reserve Bank of India (RBI) may raise the repo rate by 75-100 basis points during the current monetary tightening cycle, as inflationary pressures are expected to persist before easing in the next financial year, according to a report by SBI Capital Markets.
The brokerage said gradual rate increases remain the most likely scenario, although a larger hike in December 2026 cannot be ruled out. The RBI’s decision will depend on inflation readings for September and October.
The Monetary Policy Committee’s 25-basis-point repo rate hike and its shift in monetary policy stance from “Neutral” to “Calibrated Tightening” indicate a stronger emphasis on controlling inflation, the report said.
SBI Capital Markets expects the monetary policy cycle to reverse in the first quarter of FY28, depending on how the balance between economic growth and inflation evolves.
Retail inflation may peak in Q3 FY27
Consumer price inflation is expected to peak in the third quarter of FY27, while wholesale price inflation could begin moderating from March 2027 as favourable base effects come into play.
The report expects retail inflation to remain below 5% year-on-year beyond the first quarter of FY28, suggesting that price pressures could gradually ease in the next financial year.
However, the trajectory will depend on domestic inflation trends, global commodity prices and geopolitical developments.
India’s economic growth remained robust in the first quarter of FY27, with real gross domestic product (GDP) expanding 7.8% year-on-year, surpassing market expectations of 7.1%.
Manufacturing output grew 9.2% during the quarter, while gross fixed capital formation, an indicator of investment activity, increased 11.9%.
Despite the strong growth figures, SBI Capital Markets flagged potential risks to consumption in the second half of FY27. Rising borrowing costs, subdued rural sentiment and weaker kharif sowing could weigh on consumer demand.
The brokerage also warned that prolonged geopolitical conflicts and crude oil prices hovering around $100 per barrel could sustain inflationary pressures and increase costs across the economy.
Benchmark 10-year government bond yields have risen by around 70 basis points in calendar year 2026, reflecting concerns over inflation, monetary tightening and global financial conditions.
According to the report, bond yields are likely to remain elevated until geopolitical tensions ease and inflationary pressures moderate.
Rising yields in advanced economies and capital outflows from emerging markets are adding to financial market uncertainty, increasing pressure on domestic borrowing costs.
Higher interest rates are expected to support bank margins in the near term, although non-food credit growth could gradually lose momentum towards the end of FY27.
SBI Capital Markets expects FY27 to remain favourable for the banking sector, while bonds could regain investor interest in FY28 as inflationary pressures ease and the monetary policy cycle potentially turns more accommodative.
The outlook for both banks and bond markets will depend on the pace of rate hikes, the trajectory of inflation and developments in global financial markets.
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