UBI expects two to three increases of 25 basis points each, taking the repo rate from the current 5.25 per cent to 5.75-6 per cent. It said the outlook follows a combination of strong economic growth, rising inflation and tighter global financial conditions.
“Rate hikes are back on the table for H2 FY27,” the report said, adding that December appears to be the more likely starting point in its base-case scenario.
The report comes as foreign exchange inflows under the RBI’s special swap facility have surged to about USD 136 billion as of August 31. Of this, USD 127.23 billion came through FCNR(B) deposits, while overseas foreign currency borrowings and external commercial borrowings contributed the rest.
According to the report, large inflows have sharply increased liquidity in the banking system. Core liquidity rose from Rs 4.82 lakh crore in mid-June to Rs 8.05 lakh crore by mid-August, driven almost entirely by the foreign exchange impact.
It expects core liquidity to rise further to around Rs 14.17 lakh crore by September 11 in an illustrative scenario, making liquidity management a key challenge for the RBI.
“After getting dollar flows, now Rupee liquidity management is key policy challenge for RBI,” the report said.UBI expects the central bank to announce measures to absorb the excess liquidity before the October policy meeting. It said short- and longer-term variable rate reverse repo operations (VRRR) and incremental cash reserve ratio (I-CRR) are among the measures with a high probability of use, while bond sales and foreign exchange swaps could also be considered.
The report said the RBI could initially rely on temporary measures that can be reversed as credit demand strengthens in the second half of FY27. It estimates a 50:50 mix of short-term VRRR and longer-duration measures could be used to absorb the projected surplus.
UBI also said a rate hike in October could not be ruled out if the US Federal Reserve raises rates in September and the RBI first absorbs excess liquidity through durable measures. It added that oil prices above USD 90 a barrel could increase inflation and pressure on the rupee, while easing geopolitical tensions could give the RBI more policy flexibility.