RBI policy: Room for a rate hike, but central bank may wait till December, say economists

The US Federal Reserve interest rate action, crude oil prices surging to above $100 per barrel once again as the West Asia war escalates and consumer price inflation rising for ten straight months – all point to the need for the Reserve Bank of India (RBI) to hike rates at its upcoming monetary policy meeting from October 5-7.

But a section of economists Fortune India spoke to, indicate that the central bank may just want to wait a little bit longer – until December – before deciding to hike interest rates.

“Priority [for the RBI] will be what happens domestically. Inflation is moving in line with expectations, it was expected to peak out in Q3 (which it is) and there is a slight upside in food. The West Asia war has prolonged, oil prices are back above $100, and domestic demand is strong enough for manufacturers to pass on prices,” says Dipti Deshpande, senior director and principal economist at rating agency Crisil said.

Hike rates in December

“RBI in that caution, has room for a rate hike but in our view not now. They may wait for some more time,” she told Fortune India.

The need to hike interest rates would come if demand is growing faster than supply. “But this scenario is a pure play supply side shock, from oil and food prices,” she said. Typically, central banks would want to stay away from reacting to supply side shocks, unless they are persistent in nature and threatening to keep core inflation high.

Core inflation in India, excluding gold, is below 4% and not seen to be high.

HDFC Bank’s principal economist Sakshi Gupta said that “durability of inflationary pressures and increase will govern whether the RBI will hike interest rates in October or later. It is a close call, but our sense is December 2026,” she told Fortune India.

“There is a rational for RBI to hike rates, the decision and timing whether it is October or December will be view based,” Gupta said. She expects one rate hike in December, followed by another in February and April 2027.

Prakash Bulusu, joint CEO of IIFL Capital said “The RBI is likely to adopt a cautious and data-dependent approach in the October policy. While rising crude oil prices and their potential impact on inflation and the current account warrant close monitoring, a rate hike would depend on the persistence of inflationary pressures, their transmission into core inflation and the broader growth outlook.”

Bulusu said that a US Fed rate hike “could add pressure through global yields, capital flows and the rupee”, but India's monetary policy cannot be determined by US policy alone.

He said that the RBI commentary, communication and forward guidance will be as important as the immediate rate decision. “The markets will be watching whether the central bank sees current inflationary pressures as temporary or indicative of a more sustained trend,” he said.

Focus: Liquidity management and winter crop sowing

Deshpande said the management of excess liquidity, post the FCNR(B) deposits, is critical for the RBI. The RBI resorted to long-term Variable Rate Reverse Repo (VRRR) auctions, to cusk out huge liquidity estimated at Rs 10-11 lakh crore. It also used forex swaps and OMO (Open market operation) bond sales of Rs 1 trillion to suck out cash from the system.

Whether these operations will be successful will depend on call rates being near the repo rate. The weighted average call money rate is near 5% and the repo at 5.25%. “How the RBI manages inflation, liquidity and deals with G-Sec bond yields will be difficult to balance,” Deshpande said.

One of the other areas which needs focus is how the erratic monsoon spell in September will impact the Rabi (winter) crop sowing for wheat, rapeseed-mustard. The India Meteorological Department said rainfall in September will be below normal. “The rainfall will be critical for crop sowing of wheat, jawar and gram,” she said.

In a September report, Crisil had said that rainfall deficiency has widened to 14% so far this season, worse than expected for the southwest monsoon."Although sowing has progressed well, it does not mean the crop sector is out of danger. The focus of concern has shifted from acreage to yields, and crop incomes are likely to moderate as a result," its chief economist Dharmakirti Joshi and Deshpande said.

The data shows that monsoon shocks do sting crops, but, as seen in previous decades, they have not necessarily translated into higher food inflation.

IIFL Capital’s Bulusu said that while concerns around monsoon performance and El Niño warrant caution, the outlook will also depend on crop prices, government support measures and the ability of rural households to sustain discretionary spending.

“Rural consumption during the festive season is likely to remain uneven, reflecting regional variations in rainfall, agricultural output and farm incomes,” he told Fortune India.

“The festive season could see continued demand for essential goods and selective discretionary categories, but the pace of recovery in higher-value consumption may differ across regions. A stronger agricultural income cycle would support broader consumption, while weather-related disruptions could constrain purchasing power in affected areas,” he added.