US Fed hikes rates by 25 bps; will RBI follow suit in October?

The US Federal Reserve’s decision to raise its benchmark interest rate by 25 basis points to 3.75%-4% on Wednesday has put the Reserve Bank of India’s next policy move in focus, with economists increasingly expecting the central bank to begin tightening rates as early as its October meeting.

The Fed’s first rate hike since 2023, backed unanimously by policymakers, came amid persistent inflation, resilient economic growth and elevated energy prices in the backdrop of West Asia crisis. The central bank has also signalled that the tightening cycle may not end here, with policymakers projecting at least one more 25-basis-point rate hike this year.

With the Fed now joining the European Central Bank (ECB), Bank of Japan (BoJ), Reserve Bank of Australia (RBA), Reserve Bank of New Zealand (RBNZ) and Norges Bank on tightening paths, the global monetary policy cycle is turning increasingly hawkish.

For India, the combination of higher US yields, rising crude prices and firmer domestic inflation could make the RBI’s policy decision more challenging. The RBI has so far maintained a neutral stance, leaving the repo rate unchanged at 5.25% in its August policy review.

The next bi-monthly meeting of the Monetary Policy Committee (MPC), headed by RBI Governor Sanjay Malhotra, is scheduled for October 5-7.

Is rate hike on cards?

Axis Capital expects the RBI to raise the repo rate by 25 basis points each in October and December, taking cumulative tightening in calendar 2026 to 50 basis points. The brokerage expects the overall hiking cycle to be limited to 75 basis points.

Prateek Ancha, Chief Economist at Axis Capital, said the global policy environment has become more hawkish, reducing India’s room for policy divergence. Recent moves and guidance from the Fed, European Central Bank and Bank of Japan have contributed to the shift.

Axis Capital also flagged rising inflation risks despite core inflation remaining close to 4%. According to the brokerage, the risk of second-round effects has increased amid higher energy prices.

Another factor is the currency market. The brokerage said USD/INR forward premia remain unanchored and have risen beyond what interest-rate differentials would suggest, adding another consideration for RBI policymakers.

Liquidity conditions could also influence the timing of any rate increase. Axis Capital estimates banking-system liquidity at around ₹10 lakh crore and expects the RBI may need to absorb another ₹4 lakh crore before overnight rates consistently track the policy rate.

“Liquidity normalization” is therefore likely to be an important prerequisite for further policy-rate increases, according to the brokerage.

‘25 bps hike in Oct looks more likely’

Emkay Global Financial Services also sees the global monetary policy cycle turning more hawkish. The brokerage said September marks an inflection point for developed-market hiking cycles, with the Fed joining the ECB, BoJ, RBA, RBNZ and Norges Bank on tightening paths.

For emerging markets, however, the policy response remains more fragmented as domestic growth and inflation dynamics differ across economies.

India has seen an upside surprise in August 2026 core CPI, which, according to Emkay, comes on top of hawkish MPC minutes, the recent rise in energy prices and firmer-than-expected economic growth.

“A 25bp hike in Oct-26 by the RBI looks more likely,” Emkay said, while expecting the Indian tightening cycle to remain shallow at around 50-75 basis points.

Higher US yields could put pressure on Indian rates

The Fed’s decision has already pushed US Treasury yields higher, with the 10-year yield touching around 5%, its highest level in nearly two decades. The rise in US yields can have implications for emerging markets by affecting capital flows, currencies and domestic borrowing costs.

Apoorva Javadekar, Chief Economist at Shriram Group and CEO of Shriram Research, said the Fed’s 25-basis-point hike could mark the beginning of a prolonged tightening cycle.

“The Fed’s 25-bps hike appears to mark the start of a prolonged tightening cycle. While US yields surged, inflation expectations fell, suggesting the hike reinforced the Fed’s inflation-fighting credibility. Indian yields remain vulnerable to higher US yields,” he said.

However, Javadekar cautioned that using rate hikes to defend the rupee could have unintended consequences.

“We believe RBI rate hikes would be an inefficient tool to defend the INR, as the resulting drag on growth could itself weaken the currency over the medium term,” he said.

Global tightening adds to RBI’s policy challenge

Umesh Sharma, CIO-Debt at The Wealth Company Mutual Fund, said the Fed’s decision reflected persistent inflation, resilient growth and a strong labour market, alongside heightened geopolitical risks and higher energy prices.

The FOMC voted unanimously to raise the target range to 3.75%-4%. While the updated projections pointed to somewhat higher growth and inflation, the median projection still indicated only one additional hike in the current cycle.

Sharma said markets are also increasingly factoring in a possible Bank of Japan rate hike, while the RBI is expected to consider rate increases in forthcoming meetings, pointing to a broader global tightening trend.