SBI Research makes case for 25-basis-point RBI rate hike

• SBI Research favours a 25-basis-point rate increase, citing broader inflationary pressures and worsening global conditions

• The report expects the RBI to raise its FY27 growth forecast by 30 basis points and its inflation projection by 20 basis points

• Weak monsoon rainfall poses agricultural risks, while regulatory requirements limit banks’ ability to deploy additional deposits

SBI Research has called for a 25-basis-point increase in the Reserve Bank of India’s benchmark interest rate, arguing that rising inflation, currency pressure and global uncertainty make an early policy response increasingly necessary.

In a report released on Friday, it said the balance of risks now strongly favoured a rate hike. The RBI’s Monetary Policy Committee is scheduled to meet from 5 to 7 October to decide on the repo rate.

Geopolitical tensions, risks to crude oil prices and changes in how global markets assess risk strengthen the case for acting before conditions deteriorate further, the report said.

SBI Research also expects the central bank to increase its GDP growth forecast for FY27 by 30 basis points and its inflation forecast by 20 basis points.

Consumer price inflation rose to 4.82 per cent in August from 4.45 per cent in July. The report said price pressures were spreading more widely, adding to the argument for tighter monetary policy.

It also flagged the rupee’s depreciation, a strengthening US Dollar Index and sustained foreign portfolio investor selling. According to the report, FPI outflows since the previous Friday totalled $4.45 billion.

These conditions would test the RBI’s ability to counter speculative pressure in the currency market, SBI Research said.

A weak monsoon presents another risk to the inflation outlook. The report described the 2026 monsoon as the fourth driest since 2000, with rainfall at 87 per cent of the long-period average and deficient rainfall recorded in 43 per cent of districts.

Strong El Niño conditions and the prospect of below-normal rainfall in October could create further difficulties for rabi crop production, it warned.

On banking liquidity, SBI Research said headline figures did not fully reflect the funds available for lending. Despite record foreign exchange inflows of $143.5 billion under the special swap facility, regulatory requirements constrain banks’ deployment of incremental deposits.

The report cited the cash reserve ratio, statutory liquidity ratio and liquidity coverage ratio among these constraints.

To support projected credit growth of 16 per cent in FY27, banks could still face a deposit-creation gap of Rs 8.2 lakh crore, it estimated, citing regulatory requirements alongside UPI and Sparsh-related requirements.

SBI Research said these factors would cause system liquidity to adjust automatically over time, reducing the need for additional liquidity measures.

Although the report said there was no immediate reason for panic, it urged policymakers and regulators to prepare for the possibility that changing macroeconomic conditions could require unconventional interest-rate measures to protect broader economic interests.

With IANS inputs