SBI Research sees RBI rate hikes in Oct, Dec on oil, CPI risks

The Reserve Bank of India is likely to raise the repo rate by 25 basis points in October and follow it with another 25-bps increase in December as crude oil prices, inflation risks and global yields add pressure on policy, SBI Research said in a report dated September 11.

The rate-hike call is independent of any forthcoming action by the US Federal Reserve and is not contingent on India’s August consumer inflation print, which SBI Research expects at 4.8%-4.9%, the report said.

If oil prices remain elevated, consumer inflation for October and November could move towards 6.5% or higher, it said.

Crude oil prices have recently crossed $100 per barrel amid heightened geopolitical uncertainty. SBI Research said its quantile regression model showed crude could reach $123 per barrel over the next 15 days at the 60th quantile, while an alternate model indicated an average price of $105 per barrel over the same period.

The report said CPI inflation was showing early signs of generalisation. Inflation in the new CPI series rose to 4.45% in July from 2.73% in January. The number of commodities explaining 90% of CPI’s weighted contribution rose to 53 in July from 22 in January.

The risk of broader pass-through was pronounced in sectors where input prices were rising faster than output prices, including crude petroleum and natural gas, beverages, pharmaceuticals and electronics, SBI Research said. Crude petroleum and natural gas have an imported share of 31.3%, making the pass-through risk more material, it said.

Global yield pressures have also complicated the policy backdrop. The US 10-year Treasury yield is close to 5%, while the 30-year yield has moved back towards 5.40%, the report said. US producer prices rose 0.4% in August and 5.4% from a year earlier, while core PPI was at 4.6%, increasing market expectations of a Fed rate increase.

In India, the benchmark 10-year government bond yield crossed 7% on September 11, a level last seen on June 3, the report said. Domestic liquidity could support the front end of the curve, but may not eliminate pressure on longer tenors because an oil shock could work through imported inflation, exchange-rate pressure, expected RBI response and higher risk premia, it said.

SBI Research expects the 10-year yield to rise towards 7.15% or higher, tracking multiple domestic and external cues.

The report said the recent liquidity surge from foreign-currency inflows appeared to be short-term and should taper over the next three to four months as festive-season cash demand, tax outflows and credit demand absorb surplus funds.

As of August 31, FCNR(B) deposit mobilisation had reached $127.22 billion, nearly twice the market expectations when the RBI launched the dollar/rupee swap window in June. Total mobilisation, including external commercial borrowings and overseas foreign currency borrowings, stood at $136.38 billion, with the ECB and OFCB swap window open until December.

The inflows have increased banks’ lendable resources and created surplus banking-system liquidity. SBI Research said the $127 billion FCNR(B) mobilisation broadly matched the estimated ₹12.5 trillion funding gap for banks in 2026-27, based on expected credit growth of 16%-17% and deposit growth of 11%-12%.

The report said system liquidity should level out by the end of 2026-27 if anticipated credit demand materialises. It estimated liquidity could fall to around ₹6 trillion by March 2027 without accelerated open market operations.

SBI Research said aggressive liquidity withdrawal could create a deep deficit in the third and fourth quarters, when seasonal credit and cash demand usually rises. Since FCNR(B) deposits have been exempted from cash reserve ratio requirements, using CRR for liquidity management at this stage did not look advisable, it said.

The RBI should continue to rely on variable rate reverse repo auctions to absorb surplus liquidity, with a calendar for the next two to three months to improve bank participation, the report said.

It also said the RBI could consider selective early delivery of its short dollar positions. The central bank’s short dollar position in the one-to-three-month forward bucket stood at $23 billion, but such operations would need to be handled carefully to avoid pressure on forward premia, it said.

Clear, credible and consistent communication would be essential to anchor inflation expectations and prevent temporary price pressures from becoming entrenched, SBI Research said.