RBI MPC meet starts today: Rate hike or hold? What to expect from October monetary policy review

The Reserve Bank of India (RBI) is expected to raise its benchmark interest rate by at least 25 basis points this week as inflationary pressures build and global central banks turn more hawkish, according to economists and bankers.

The Monetary Policy Committee's three-day meeting begins on Monday, October 5, with its decision due on Wednesday, October 7.

A rate hike would be the first since February 2023, when the RBI raised the repo rate by 25 basis points to 6.50%.

The central bank subsequently kept rates unchanged through 2023-24 before starting an easing cycle in 2025. The repo rate currently stands at 5.25%.

SBI Research said in a report ahead of the meeting that the balance of risks had "tilted decisively" towards a 25-basis-point hike, citing broadening inflation, worsening global macroeconomic conditions, evolving liquidity conditions and renewed repricing of global risks.

India's retail inflation accelerated to an eight-month high of 4.82% in August from 4.45% in July, remaining above the RBI's 4% target for a third straight month.

SBI Research expects inflation to rise to 5.65% in September and cross 6.5% in October and November before easing below 6% in early 2027.

"Coordination with global central bank hikes, rising inflation risks and strong growth momentum provide policy space to hike," said Kanika Pasricha, chief economic advisor at Union Bank of India.

The RBI's policy decision comes against a backdrop of renewed global inflation risks and higher energy prices.

South Korea and the Philippines raised rates in August, while the United States, Japan, euro area and New Zealand raised rates in September.

The 10-year US Treasury yield also rose to 5.33% on September 30, adding to pressure on global financial markets.

The rupee has also come under pressure from a stronger dollar, higher demand from oil marketing companies and corporates, foreign bank demand and selling by foreign portfolio investors.

SBI Research said the currency's decline and a stronger dollar would test the RBI's ability to counter speculative forces, while bond yields were also expected to rise.

It said India did not need to "press the panic button" yet, but policymakers should prepare for unconventional measures if global conditions deteriorate further.

Will the RBI hike repo rate?

A majority of participants in a PTI poll expect a rate hike accompanied by a hawkish tone, but views are divided on whether the policy stance will change.

Some economists, however, expect the RBI to hold rates.

Sachchidanand Shukla, group chief economist at Larsen & Toubro, said the central bank could wait because there was still no evidence of demand-led inflation or an overheating economy.

Dipti Deshpande, principal economist at Crisil, said inflationary pressures had increased since the last policy, mainly because of the renewed escalation of the West Asia conflict and pressure on energy and commodity prices.

"If these pressures persist, further rate hikes are expected," she said.

Economists largely expect at least two rate increases in the current fiscal year, with several forecasting two to three hikes.

"Gradual normalisation of policy as headline inflation is higher. The rate hike is needed to ensure real rates are not negative in the coming quarters," said Gaura Sengupta, economist at IDFC First Bank.

Stance and inflation outlook

Economists are split between keeping the RBI's policy stance unchanged and moving towards calibrated tightening, with some expecting a "withdrawal of accommodation".

There is greater agreement on the tone, with most expecting a hawkish message reflecting concerns over inflation and global monetary policy.

The RBI is also expected to raise its inflation forecast for 2026-27 from the 5% projected in August, amid higher crude prices, food inflation risks and broader price pressures.

"The recent surge in crude oil prices to above USD 100/barrel could likely lead to an increase in the retail selling price (RSP) of petrol and diesel, and further generalisation of price pressures, which would necessitate an upward revision in the CPI inflation forecasts," said Aditi Nayar, chief economist and head of research and outreach at ICRA.

Apoorva Javadekar, chief economist at Shriram Group, expects a mild upward revision of 10 basis points to the inflation forecasts for the third and fourth quarters of 2026-27.

"In fact, the upward revision to future inflation is almost a pre-condition for a rate hike, as otherwise the inflation is progressing on the projected path," Javadekar said.

Rajani Sinha, chief economist at CareEdge Ratings, said price pressures were becoming increasingly broad-based, with around 19% of the 358 items in the CPI basket recording inflation above 6% in August, up from 13% in March.

In its August policy, the RBI projected CPI inflation at 5% for 2026-27, with quarterly inflation at 4.7% in the second quarter, 5.9% in the third and 5.5% in the fourth. Inflation for the first quarter of 2027-28 was projected at 5.3%.

Core inflation was projected at 4.3% for 2026-27.