New Delhi, Oct 8: The Reserve Bank of India (RBI) could raise the repo rate again over its next two monetary policy meetings as the central bank steps up efforts to contain inflation and manage excess liquidity in the banking system.
According to a report, the RBI could deliver back-to-back rate hikes of 25 basis points, potentially taking the repo rate to 6 per cent. The expectation comes after the Monetary Policy Committee (MPC) raised the policy rate by 25 basis points to 5.5 per cent on October 7 and shifted its stance from ‘neutral’ to ‘calibrated tightening’.
The change in policy stance signals that the central bank is now more focused on managing inflationary pressures while keeping financial conditions aligned with its monetary policy objectives.
RBI Focuses on Surplus Liquidity
Alongside interest-rate action, liquidity management is emerging as a key priority for the central bank.
India's banking system has been carrying a substantial liquidity surplus in recent months, driven partly by large foreign currency inflows. The RBI has been using tools such as variable rate reverse repo (VRRR) operations, open market operations (OMOs) and foreign exchange interventions to absorb excess funds and keep short-term market rates aligned with the policy rate.
According to the report, the RBI may need to absorb or manage an additional ₹2 lakh crore of liquidity to maintain surplus liquidity at a level considered appropriate for the banking system.
The central bank could use a combination of liquidity-management measures rather than relying on a single instrument. This includes market operations and foreign exchange-related measures.
Inflation Remains a Key Concern
The possibility of further rate hikes comes amid renewed concerns over inflation, particularly from higher food and energy prices.
The RBI has raised its inflation forecast for FY27 to 5.2 per cent, while its GDP growth projection has been increased to 7.1 per cent. The central bank expects growth to remain strong, but rising input costs and external risks could keep inflation pressures in focus.
The recent rise in crude oil prices and elevated global bond yields could add to the pressure on India's inflation outlook, particularly because the country remains heavily dependent on imported energy.
What Higher Rates Could Mean for the Economy
A further increase in the repo rate would make borrowing more expensive for banks and could gradually translate into higher interest costs for some borrowers.
Home loans, business loans and other forms of credit could become costlier if banks pass on higher funding costs. At the same time, tighter monetary conditions could help moderate excess demand and keep inflation expectations under control.
For savers, higher interest rates could provide some support to deposit and fixed-income returns, although the impact would depend on how banks adjust their deposit and lending rates.
RBI Balances Growth and Price Stability
The central bank faces the challenge of balancing economic growth with price stability. India's economy continues to show resilience, with the RBI projecting 7.1 per cent growth for FY27, but inflation risks and global uncertainties are making the policy environment more complicated.
The RBI's recent shift towards calibrated tightening suggests that future decisions will remain closely linked to incoming data, inflation trends, global financial conditions and domestic liquidity.
If the expected rate hikes materialise, the repo rate could move closer to 6 per cent, marking a significant shift from the easing cycle seen earlier.
For businesses, consumers and financial markets, the next few policy meetings will therefore be closely watched as the RBI seeks to control inflation, absorb surplus liquidity and maintain stability without putting unnecessary pressure on economic growth.
