Mumbai | The Reserve Bank may hike the key policy rate by 25 basis points (bps) each at the October and December policy reviews as headline inflation is expected to rise further and stay elevated, analysts said.
Oil prices re-touching the USD 100 per barrel mark with renewed tensions in West Asia, El Nino worries continuing with the conditions set to intensify, likelihood of the narrowing rate differential between India and the US in light of the Federal Reserve's moves towards starting to hike rates and the strong GDP growth are the key factors that will influence the RBI to hike interest rates, according to analysts.
The expectations came a day after official data showed consumer price inflation rising to 4.82 per cent in August from July's 4.45 per cent.
"Given that ... oil prices have risen above USD100/barrel once again, we think the time has come for the RBI to commence the rate hike cycle, particularly as growth remains considerably strong despite the ongoing West Asia crisis," a note by analysts at foreign brokerage Deutsche Bank said.
The brokerage said it is advancing the rate hike expectation to October from the earlier estimate of the hardening to happen from December after the release of hawkish minutes of the August review, the inch up in inflation, strong GDP growth and the US Fed's imminent rate hikes.
"Going forward, we believe CPI inflation may cross 6.5 per cent mark before dropping to less than 6 per cent in early 2027. (It is) time to build moats through a 25-bps hike in October and December MPC (monetary policy committee meetings) each, and then to pause," economists at the country's largest lender SBI said.
Foreign brokerage HSBC also expects two rate hikes in October and December, and added that inflation is likely to stay above 5 per cent for nine consecutive months.
Deutsche Bank believes the RBI will take a breather in February and raise interest rates again at the April and June 2027 reviews, taking the overall hikes to 1 percentage point (100 bps) in the current rate increase cycle, which will begin in October.
The RBI has opted for a status quo in rates for over a year now. The repo rate, at which it lends to the system, currently stands at 5.75 per cent.
Deutsche Bank said the last policy review statement was dovish, which prompted it to believe that the rate hikes will start in December, but the "hawkish" tone of the six-member rate-setting panel revealed in the minutes of the meeting along with possibilities of a Fed hike made it go back to the expectation of a rate hike coming in October.
The German entity noted that the RBI's quarterly CPI inflation profile for FY27 is 4.7 per cent in Q2FY27, 5.9 per cent in Q3 and 5.5 per cent in Q4FY27.
A status quo on the rates amid an increase in headline inflation will lead to the real rate turning negative from Q3FY27, and it will remain so for at least nine months if the repo rate is maintained at 5.25 per cent, it said.
"Such an outcome would be inconsistent with the RBI's previously preferred range for real policy rates of positive 1.4-1.9 per cent," it said.
The brokerage said it expects the US Fed to hike rates by 0.25 per cent each at the end of September, December and March.
Underlining the importance of relative interest-rate differentials for sustaining capital inflows, the brokerage said some Asian central banks have already hiked rates.
"The RBI's challenge would shift from managing a largely supply-driven inflation shock to re-establishing real-rate credibility in an increasingly restrictive global environment," it added.
After the liquidity-absorbing open market operation announcement, the next step will be to hike rates, it said.