New Delhi, Sept 23:
The Reserve Bank of India (RBI) could raise interest rates at both its October and December monetary policy meetings as inflationary pressures build, according to Rob Subbaraman, Head of Global Macro Research at Nomura. He expects two 25-basis-point increases if price pressures remain elevated.
Subbaraman’s assessment comes amid a rise in India’s retail inflation. Consumer price inflation increased to 4.82 per cent in August from 4.45 per cent in July, moving further above the RBI’s 4 per cent medium-term target. Economists have also flagged the possibility of inflation moving higher in the coming months, particularly because of food and energy price pressures.
Higher crude oil prices are another concern for policymakers. Rising energy costs can increase transportation and production expenses and eventually feed into consumer prices. Analysts have also pointed to global monetary conditions, including a more hawkish stance from the US Federal Reserve, as a factor that could influence the RBI’s policy decisions.
The RBI currently has its policy rate at 5.25 per cent. A sustained rise in inflation could reduce the room for keeping monetary policy accommodative, particularly if price pressures begin to spread beyond food and fuel. However, the timing and size of any rate increase will depend on incoming inflation, growth and liquidity data.
India’s economic growth remains relatively strong. Nomura has forecast GDP growth of 7 per cent for FY27, while the latest data showed the economy grew 7.8 per cent in the first quarter of the financial year. Strong domestic activity could provide the RBI with greater flexibility to focus on containing inflation if price pressures persist.
Subbaraman also pointed to opportunities for India to attract more global investment and gain a larger role in global value chains, particularly through higher-end manufacturing. He said stronger capital inflows, including through FCNR-B deposits, could support India’s external position.
Globally, the US Federal Reserve’s policy path remains an important factor. The Fed recently raised its policy rate by 25 basis points to 3.75-4 per cent, while Nomura expects at least one more increase this year. Continued tightening by the US central bank, alongside elevated energy prices, could add to the policy challenges faced by emerging-market central banks.
The RBI’s October 5-7 monetary policy meeting will therefore be closely watched for signals on the central bank’s response to rising inflation. While some analysts expect two hikes by December, other market views have favoured waiting for clearer evidence that inflation pressures are becoming persistent.