RBI May Resume Rate Hikes In FY27; Repo Rate Could Rise To 6%

The Reserve Bank of India (RBI) may resume interest rate hikes in the second half of FY27, with the repo rate potentially rising to 5.75-6 per cent, according to a Union Bank of India report.

The bank expects the central bank to raise the benchmark rate by 25 basis points on two to three occasions from the current 5.25 per cent, with December seen as the most likely starting point.

The report said stronger economic growth, rising inflation and a sharp increase in banking liquidity could bring rate hikes back into consideration for the RBI.

A key factor is the surge in foreign exchange inflows through the central bank’s special swap facility. These inflows reached around $136 billion as of August 31, including $127.23 billion through FCNR(B) deposits, while the remainder came through overseas foreign currency borrowings and external commercial borrowings.

The inflows have significantly increased liquidity across the banking system. Core liquidity rose to Rs 8.05 trillion by mid-August from Rs 4.82 trillion in mid-June.

Under an illustrative scenario, it could reach around Rs 14.17 trillion by September 11.

Union Bank expects the RBI to focus on absorbing the surplus before its October policy meeting.

Short- and longer-term variable rate reverse repo operations (VRRR) and an incremental cash reserve ratio (I-CRR) are among the measures considered most likely.

The RBI could use bond sales and foreign exchange swaps.

The report expects the central bank to favour temporary measures initially. It can then reverse them as credit demand improves.

An October rate increase, however, remains possible if the US Federal Reserve raises rates in September and the RBI first removes excess liquidity through durable measures.

Also Read: Stock Market Today: Sensex, Nifty Open Higher As IT Stocks Lead Gains