Decision week: markets price in first RBI rate hike in nearly four years

The RBI's Monetary Policy Committee begins its Oct 5–7 meeting on Monday with investors betting the central bank will raise the repo rate by 25 basis points to 5.50% — its first hike since February 2023.

Nearly 60% of economists polled by Reuters — 35 of 61 — expect a 25-basis-point increase at the end of the MPC's three-day meeting on Wednesday, while swap markets have fully priced in a hike. If delivered, the benchmark repo rate would rise from 5.25%, where it has sat for nearly 10 months.

The case for tightening has hardened: consumer inflation hit 4.82% in August, above the RBI's 4% medium-term target for a third straight month, with prices across nearly half of the CPI basket rising at or above target. Growth stayed resilient at 7.8% in the April-June quarter, and major central banks have turned more hawkish.

Bank of America's Rahul Bajoria expects the RBI to open a 100-basis-point tightening cycle this month, saying the central bank has ‘little reason to wait’ and must act before inflation risks become entrenched. The rupee, down about 6% this year, adds to the pressure on Governor Sanjay Malhotra's committee.