ICRA expects another 25-bps repo rate hike in December

Rating agency ICRA expects the Reserve Bank to raise the benchmark policy rate by another 25 basis points in December, after the central bank increased the repo rate and shifted its stance towards calibrated tightening on Wednesday, October 7.

The Monetary Policy Committee (MPC) on Wednesday unanimously raised the repo rate by 25 basis points to 5.50%, the first hike in more than three years, and changed its stance to 'calibrated tightening' from 'neutral' with a 4:2 majority.

"Rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook," Malhotra said announcing the MPC decisions.

With the decision, India has joined major central banks in raising rates as higher oil prices triggered by the Iran war fuel inflation, squeeze purchasing power and weigh on currencies.

ICRA said the RBI's decision was in line with its expectations and reflected rising concerns over inflation.

It expects another 25-basis-point hike at the December meeting, followed by a pause unless there are sizeable negative surprises on the inflation front.

The MPC raised its inflation forecast for 2026-27 by 20 basis points to 5.2%, while increasing its GDP growth projection by 40 basis points to 7.1%.

ICRA said the inflation outlook has become less benign, with headline CPI inflation expected to average around 5.8% over the next three quarters.

It also pointed to an increase in core inflation and signs that price pressures were becoming broader.

The agency expects headline inflation to average 5% in 2026-27 in its baseline scenario, assuming crude oil prices average $85-95 per barrel in the second half of the fiscal and petrol and diesel retail prices remain unchanged.

However, if crude prices remain elevated, inflation could rise to 5.3-5.5% in 2026-27, depending on the timing and extent of increases in retail fuel prices, ICRA said.

ICRA broadly agreed with the RBI's 7.1% projection for 2026-27, but flagged risks from deficient monsoon rainfall, lower reservoir levels, elevated crude oil prices and the impact of the strong base created by GST rate rationalisation.

If crude oil prices average around $100 per barrel in the second half of 2026-27, GDP growth could moderate to around 6.8%, it said.

ICRA expects seasonal currency leakage and the unwinding of the RBI's forward book to weigh on liquidity in the second half of 2026-27. It said the central bank is likely to primarily use VRRR auctions to absorb excess liquidity.

Meanwhile, the 10-year government security yield is expected to trade in the 7.15-7.35% range in the near term, ICRA said, adding that yields could harden further as expectations of a December rate hike become more certain.