After the expected announcement by Fed Chair Kevin Warsh, the US 10-year yield inched higher with the markets pricing in more rate increases, as the Federal Reserve seeks to balance its twin objectives of price stability and full employment through a period of potentially inflationary geopolitics.
Read more: Rupee ends flat as RBI intervention, portfolio flows blunt Fed hike impact
“For India, this probably means bringing the start of the rate hike cycle closer as the rate differential eases, leading to renewed pressure on currency,” Yes Bank chief economist Indranil Pan said.
Time to yield A lower interest rate differential may make it harder to attract investments
The European Central Bank, Bank of Japan, the Reserve Bank of Australia, the Reserve Bank of New Zealand and Norges Bank (the central bank of Norway) have already taken the contractionary policy path. The Fed, which joined Wednesday, also signalled more tightening likely in December.
Most India-focused economists expect Mint Road to increase the local policy rate by 25 basis points. The last time the Reserve Bank of India (RBI) changed the repo rate was in December 2025 when it had softened by 25 bps to 5.25%.
“A 25 bps hike in October by the RBI looks more likely, but we also expect this to be a shallow hiking cycle (50-75 bps) and will await more clarity at the October review,” Madhavi Arora, lead economist at Emkay Global Financial Services, said Thursday.Economists at Deutsche Bank, DBS, Nomura and State Bank of India expect a rate hardening after retail inflation hit a 20-month high of 4.82%.
“In light of the faster surge in food and oil prices, and higher super core momentum, we are changing our repo rate call to a 25 bps hike each in October and December from a hold,” Nomura’s research analyst Sonal Varma said a couple of days ago. “We assign a 60% probability to a 25 bp rate hike in October versus 40% to a rate hold, implying this remains a close call,” she said.
The Price Pinch
India’s retail inflation measured by Consumer Price Index was 4.5% in July and 4.4% in June. Now, it’s a third month in a row that CPI remained over 4%, which is the central target under the RBI’s flexible inflation targeting framework.
Food price inflation jumped to 6% from 5.5% a month prior, led by sugar and vegetables, and core inflation rose to 4.2% from 3.9%.
“Add to this, recent developments including a sustained rise in crude prices, tightening global financial conditions, firm domestic growth and signs of broadening in core pressures, strengthen the case for a shallow 50 bps hike in second half of FY27, making October’s meeting a live one,” DBS Bank senior economist Radhika Rao said.
Varma, too, expected a shallow rate hiking cycle of 50 bps in October and December.