The balance of risks has tilted decisively towards a 25-bps rate hike by the RBI at this juncture, as a combination of broadening inflationary pressures, worsening global macros, evolving liquidity conditions and a renewed global repricing of risks is making the case for pre-emptive action stronger, SBI Research
NEW DELHI — The balance of risks has tilted decisively towards a 25-bps rate hike by the RBI at this juncture, as a combination of broadening inflationary pressures, worsening global macros, evolving liquidity conditions and a renewed global repricing of risks is making the case for pre-emptive action stronger, SBI Research said on Friday.
The RBI's Monetary Policy Committee (MPC) is scheduled to meet from October 5-7, to decide on the benchmark repo rate.
The SBI report said that with geopolitical tensions, crude-price risks and global repricing of risks, “it would be prudent for us to rather act pre-emptively than being behind the curve.
“We also expect the RBI to upgrade the GDP forecasts upwards by 30 bps and inflation forecast by 20 bps for FY27,” it said.
Inflation is becoming increasingly broad-based. CPI inflation rose to 4.82 per cent in August from 4.45 per cent in July.
Amid the Indian rupee being caught in a downward spiral, strengthening of Dollar Index, and constant pressure from FPI selling since last Friday ($4.45 billion), the conviction in RBI’s ability to meaningfully intervene and thwart speculative forces would be litmus test of its innate strength, said the report.
“Even as rate hike looks imminent, the monsoon story deserves attention. The 2026 monsoon was the 4th driest since 2000, at just 87 per cent of LPA, with 43 per cent of districts receiving deficient rainfall,” it noted.
Strong El Nino conditions and below-normal October rainfall could pose further risks to Rabi output.
Also, liquidity is high in headline terms, but effective liquidity creation is much lower under the hood.
Despite record $143.5 billion forex inflows under the special swap facility, regulatory requirements (CRR/SLR/LCR) constrain the deployment of incremental deposits.
“We estimate that to support an estimated 16 per cent credit growth for FY27/loans create deposits, there will still be a gap of Rs 8.2 lakh crore in deposit creation by banks because of regulatory dispensation, UPI and Sparsh requirements,” said the SBI report.
Hence, going forward, system liquidity will automatically adjust and there is no need for additional manoeuvring.
While India need not press the panic button as of now, policy makers and regulators would do well to brace for an eventuality where evolving macros force resorting to some unconventional rate measures to safeguard broader interests, said the report.