RBI expected to announce 25 bps interest rate hike, the first since Feb 2023

The deepening of inflation and the increase in the crude oil FOB price (Indian basket) to $120.5 per barrel from $90 per barrel at the time of the previous monetary policy are causing more economists to believe that the Reserve Bank of India (RBI) will consider hiking interest rates by 25 basis points at the monetary policy announcement on October 7.

The RBI last announced a rate hike in February 2023. In calendar year 2026, the central bank has kept interest rates unchanged at 5.25%, while in 2025, the RBI cut rates four times and paused three times.

The RBI Monetary Policy Committee (MPC) will announce its rate decision on October 7, which in all likelihood would be a 25 bps rate hike. Opinion is divided on whether the central bank will maintain a neutral stance or shift to an accommodative stance. A neutral stance will give the central bank flexibility to keep adjusting policy rates as the economic situation evolves.

“There is a greater possibility now that the RBI will hike interest rates by 25 basis points. What changed dramatically between the previous policy and October was the rising crude oil situation. While crude oil prices have surged, other Asian economies such as Indonesia and Thailand have raised their fuel prices. India has not done much,” said Dipti Deshpande, senior director and principal economist at Crisil.

In India, while mining, metals, pharma and construction have seen prices rise, now cement and FMCG have also seen prices rise.

She added that the monsoon, which was an emerging risk, has now materialised. “It is not just the kharif crop which was affected, but now even the rabi (winter) crop could be stressed. It could mean a change in soil moisture, dampening of yields and finally farmer income. Two sub-par incomes from back-to-back crops means that food price pressures will rise. This will mean pressure on inflation, which is anyway likely to peak in Q3 FY27. It is better that the RBI be pre-emptive than wait,” she added.

Rate hike as a precautionary measure

L&T’s group chief economist Sachchidanand Shukla agreed that the RBI is expected to raise rates by 25 bps on October 7, but “more as a ‘precautionary, insurance’ tool.” His argument is that India’s economy is not yet showing signs of overheating. “A rate hike is a demand management tool and cannot do much to the supply-side pressures, which are in the form of rising crude oil and food inflation concerns,” he told Fortune India.

No action was taken in August as MPC members did not see the economy overheating and saw no signs of broadening inflation pressures.

“Now maybe we are in that delicate phase, where if there is a delay (in taking a rate decision), it could get into the expectation bit. The reason to hike is not absolute, but precautionary, an insurance,” he said. It would also be better to take a decision before the US goes into the 2026 mid-term elections.

The RBI is likely to lower growth forecasts and alter inflation forecasts. India’s retail inflation, based on the consumer price index, rose to 4.82% in August 2026, an eight-month high.

RBI commentary, liquidity to be closely watched

Economists Fortune India spoke to said they will closely monitor the commentary and the tone from RBI Governor Sanjay Malhotra. The commentary on the current surplus liquidity in the banking system and how the RBI is dealing with it will be closely watched.

The RBI has sucked out about ₹6 lakh crore in excess rupee liquidity from the banking system, after a record ₹11.16 lakh crore came into the system. This was due to banks collecting a record $136 billion in FCNR(B) deposits through a special swap window scheme.

Crisil’s Deshpande said that she expects the RBI Governor to be “more cautious than earlier.” Shukla from L&T hopes that the Governor explains the rationale for whatever rate decision is taken.

“RBI must manage its signalling; it should not scare the market and investors into believing that there is a long rate hike cycle coming. The central bank should not lock itself into something which is futuristic. Decisions should be data-dependent,” he said.