New Delhi: Given the steepening inflation trajectory currently underway, the RBI’s December policy cycle could mostly deliver a jumbo 50 bps rate hike depending on the global conditions, a report by SBI Research said on Wednesday.
As global conditions are likely to turn volatile soon, the window of opportunity of RBI rate hike in small increments must be avoided.
“A 6 per cent repo rate by December could be the best possible option,” said Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India (SBI).
Reacting to the RBI’s MPC which delivered a decisive policy message — a unanimous 25 bps increase in the repo rate to 5.50 per cent – the report said that policy choice ahead is now effectively restricted to rate hike or pause, depending on the evolving inflation-growth dynamics.
“The RBI has raised projection for both GDP growth (by 40 bps to 7.1 per cent) and CPI inflation (by 20 bps to 5.20 per cent) for FY27. We believe that Q2FY27 GDP growth is likely to touch 7.5 per cent,” said Dr Ghosh.
Beyond the repo rate action itself, “we believe the October policy communication represents a transition from watchfulness to explicit tightening. Our analysis of the Governor’s Statement and the Monetary Policy Statement reveals a marked convergence in their degree of hawkishness this time around, a significant change from the communication divergence that we had identified in the previous policy cycle,” Dr Ghosh noted.
Notably, India needs a clear AI policy to facilitate capital flows as without a clear policy, capital flows in unlikely, said the report, adding that the need of hour to provide guardrails for rupee that is effectively moving towards a dreaded benchmark now.
The SBI’s analysis of historical RBI policy cycles suggests that the extent of monetary tightening has broadly been calibrated to the intensity and persistence of inflationary pressures.
Interestingly, as the inflation environment moderated across successive RBI regimes, the peak policy rate also tended to moderate. Against this historical backdrop, “our estimates suggest that with inflation currently expected to peak at around 6.8 per cent in November 2026, the corresponding peak repo rate could be around 6.0 per cent,” said the report.
However, the quantum and pace of rate hikes could differ materially depending on the evolution of the inflation trajectory. The pace of the tightening cycle is equally important.
(IANS)
