Inflation Adds to Concerns; Repo Rate May Rise Again in December

According to research by SBI, the Reserve Bank of India (RBI) may increase the repo rate by 0.25 percent—bringing it to 5.75 percent—in December, driven by rising inflation. However, the likelihood of further interest rate hikes in February remains low.

The impact of inflation may now extend beyond the pockets of the general public to affect their loan installments. The Reserve Bank of India (RBI) is expected to make a significant decision regarding interest rates during the upcoming meeting of its Monetary Policy Committee (MPC) in December.

An SBI Research report suggests that the central bank could raise the repo rate by 0.25 percent, or 25 basis points. The report notes, however, that a larger, 0.50 percent hike is considered unlikely.

Retail Inflation Raises Concerns for the RBI

Data released by the government indicates that the retail inflation rate has climbed to 6.09 percent. This marks the first time since the introduction of the new data series that inflation has breached the RBI’s target range of 2 to 6 percent. The report estimates that inflation may remain above 6 percent next month as well, though it is expected to decline thereafter.

Rate Could Rise from 5.50 to 5.75 Percent

SBI Research projects that the repo rate could increase from its current level of 5.75 percent in the December meeting. The report mentions that while there are signs of easing pressure regarding inflation, the value of the rupee, and certain international market factors, the current economic climate still points to the possibility of a modest interest rate hike.

Low Probability of Further Hikes in February

SBI Research suggests that the prospect of consecutive interest rate hikes is diminishing. According to the report, the repo rate might eventually settle around 6 percent, though there is also a possibility that it could stabilize at 5.75 percent. Instead of raising rates again in February, the central bank may make a decision based on economic data. In this context, the December meeting of the Monetary Policy Committee (MPC) will be highly significant for the general public, borrowers, and investors. Ultimately, however, the decision regarding any changes to the repo rate rests with the RBI.

Potential relief from foreign investment and crude oil

The report also highlights several positive indicators for India. An improving environment within the artificial intelligence (AI) sector could enhance the appeal of the Indian market, potentially leading to an increase in investments from Foreign Institutional Investors (FIIs). According to the report, FII inflows have reached approximately $7.65 billion since November 6.

Furthermore, a potential easing of tensions between the United States and Iran could provide relief regarding crude oil prices. Following the US elections, oil prices have seen a decline of about 11 percent. It is estimated that the average price may hover around $87 per barrel.