The Reserve Bank of India’s Monetary Policy Committee is poised to raise its repo rate by 25 basis points in its upcoming meeting, the first adjustment since February 2023. Such a move would bring India in line with other major central banks, including the Federal Reserve, European Central Bank, and Bank of Japan, which have all adopted tighter monetary stances in recent months.
The RBI has maintained its benchmark rate at 5.25% since December 2023, when it reduced the rate by the same increment. A potential increase now reflects mounting concerns over inflation and economic strength. Consumer price inflation reached a 20-month peak of 4.82% in August—surpassing the RBI’s 4% midpoint target for the third consecutive month—while GDP growth held steady at 7.8% in the first quarter of the current fiscal year. Industrial production also climbed 8% in August, indicating persistent economic momentum.
Higher oil prices, driven by ongoing tensions between the US and Iran, and a weaker-than-expected monsoon season could further raise inflation in the near term. The Indian rupee has already fallen past 96 per dollar, intensifying currency-related pressures. With the Federal Reserve’s recent rate hike reducing the interest rate differential, the RBI faces increased expectations to respond accordingly.
Market analysts now widely expect a 25-basis-point increase, lifting the repo rate to 5.50%. Rajeev Sharan, head of research at Brickwork Ratings, emphasized that inflation, crude prices exceeding $100 per barrel, and the Federal Reserve’s policy shift have reinforced the case for tightening. “Major global central banks have embarked on a path of monetary tightening, and the Reserve Bank of India (RBI) now looks set to follow suit. After interest rate hikes by the US Federal Reserve, the Bank of Japan (BoJ), and the European Central Bank (ECB), the RBI, too, may increase the repo rate by 25 basis points next week on 7 October.”
While a rate hike of this scale is already factored into market expectations, its immediate impact on investor sentiment may be modest. Financial advisors recommend against reducing equity allocations, particularly in banking, where higher lending rates could improve profitability. Instead, they suggest shifting funds into short-term debt instruments for investors with a three-year timeframe.
V K Vijayakumar, chief investment strategist at Geojit Investments, maintained that equities retain appeal despite recent declines. The Nifty has dropped 15% from its two-year high, creating more favorable valuations. “There is a high probability of a 25bp rate hike next week. This has become almost inevitable amid rising prices and central banks like the Fed turning hawkish. Reducing equities in the portfolio is not necessary, since equities in segments like banking will benefit when floating rates rise. Investors with a 3-year time horizon can add short-duration debt funds to their portfolio,” he said.
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