SBI Research sees scope for 25 bps rate hikes in October and December

The Reserve Bank of India (RBI) may have room to raise the policy rate by 25 basis points each at its October and December monetary policy meetings as inflationary pressures broaden and global risks intensify, according to SBI Research. 

India’s retail inflation, based on the new CPI series, rose to 4.82% in August 2026 from 4.45% in July, with price pressures broadening across most divisions. Rural inflation was higher at 5.23%, compared with 4.31% in urban India, SBI Research said in its latest Ecowrap report. 

Food inflation rose to 5.66% in August, driven by higher prices of select items such as onions, ginger, and garlic. Core inflation, excluding food and fuel, household, and transport components, also increased to 4.16% from 3.87% in July. 

According to SBI Research, the latest data suggest that inflation is becoming increasingly broad-based. In January 2026, just 22 commodities accounted for 90% of CPI’s weighted contribution. By August, the number had risen to 51. 

At the same time, the contribution of the top 25 commodities, excluding gold and silver, declined from 83% in January to 62% in August, indicating a wider spread of price pressures across the consumption basket. 

SBI Research expects CPI inflation to cross 6.5% before easing below 6% in early 2027. Against this backdrop, it said the October and December MPC meetings could provide an opportunity for “nuanced” rate hikes of 25 basis points each, followed by a pause to assess incoming data. 

Oil prices add to inflation risks 

The outlook has become more challenging amid the escalation of the West Asia conflict and its potential impact on global energy supplies. Brent crude was trading above $100 a barrel, while the Indian crude basket has risen sharply from $82.04 a barrel in July to $90.19 in August and $109.76 in September, SBI Research said. 

“Crude oil prices are expected to stay over $100 per barrel in the near future with higher volatility,” it said. 

The pass-through of higher crude prices to consumers has so far remained partial, as retail fuel prices have not fully adjusted. Electricity, gas and other fuel inflation stood at 3.09% in August, compared with a much sharper 22.93% rise in the fuel and power component of the Wholesale Price Index. 

Imported inflation also remained elevated, rising 7.75% year-on-year in August against headline CPI inflation of 4.82%. Telangana recorded the highest imported inflation at 12.68%. 

Bond yields pose another challenge 

SBI Research also flagged a global repricing of bond markets, with long-duration sovereign yields rising as investors demand higher compensation for fiscal risks, persistent inflation uncertainty and increased government borrowing. 

The US 10-year Treasury yield has crossed 5%, while Japan’s 10-year yield has touched 3%, its highest level since 1996. European and UK yields have also moved higher. 

India is entering this global bond-market repricing with relatively credible fiscal fundamentals, but domestic borrowing requirements could add pressure. The Centre’s FY27 gross market borrowing stands at ₹16.09 lakh crore, with ₹8.20 lakh crore, or about 51%, scheduled for the first half of the fiscal year. The 10-year segment accounts for the largest share at 29%. 

Higher yields are already weighing on corporate borrowing. Indian companies raised around ₹61,760 crore through private-placement bonds in August, down 45% from July, according to SBI Research. The benchmark 10-year government bond yield has moved towards 7.10%. SBI Research warned that yields could rise towards 7.25% and potentially 7.50% if oil prices remain elevated and energy-security concerns worsen. 

The report also said surplus banking-system liquidity generated by large FCNR(B) inflows could gradually be absorbed as credit demand strengthens. The $127 billion inflow almost matches the estimated ₹12.5 lakh crore funding gap expected in the banking system during FY27, suggesting that liquidity could normalise by the end of the fiscal year if credit growth remains strong.