As RBI rate hike looms, action beyond 25 bps a minor possibility

Why The RBI Meeting Matters

The Monetary Policy Committee of the Reserve Bank of India started a three-day deliberation on Monday, with its decision due on Wednesday. Most economists expect the repo rate to be raised by 25 basis points to 5.5 per cent. Some, however, argue a larger increase is possible. A senior economist, speaking off the record, said that since the committee is acting after falling behind the curve, a 50-basis-point hike cannot be dismissed. This would be the first rate increase since February 2023, ending a gap of more than three and a half years.

What The Data Shows

The committee had unanimously held the repo rate at 5.25 per cent on August 5, with reassuring commentary. The minutes released a fortnight later carried a different tone. Governor Sanjay Malhotra observed that headline retail inflation, which averaged about 2 per cent in 2025-26 when the rate was cut to 5.25 per cent, was showing signs of normalising, suggesting a possible recalibration. Deputy Governor Poonam Gupta saw scope for an increase during the year. Consumer price index inflation touched 4.82 per cent in August, the third straight month above the 4 per cent medium-term target though still inside the 2-6 per cent band. RBI projections show inflation averaging 5.9 per cent in the last quarter of 2026 before easing to 5.5 per cent and 5.3 per cent in the first two quarters of 2027. Price pressures are broad: 314 of 358 CPI items became costlier in August, against 310 in July and 236 in February. Drivers include energy prices linked to the West Asia conflict, weak monsoons affecting food, costly consumer electronics, a low base until around April 2027, and firm demand.

Why It Matters For Business

State Bank of India's Soumya Kanti Ghosh expects an increase of at least 25 basis points. Emkay Global's Madhavi Arora and Harshal Patel do not rule out 50 basis points as policy catch-up. Morgan Stanley, led by Upasana Chachra, foresees four consecutive 25-basis-point hikes takin…