An SBI Research report predicts the RBI may implement two 25-bps rate hikes by December. This is in response to broadening inflation, expected to exceed 6.5%, and rising global crude oil prices which are intensifying imported price pressures.
Inflation Outlook and Drivers
SBI Research expects consumer price inflation to breach 6.5 per cent in the coming months before easing below 6 per cent in early 2027, making a case for the central bank to build a policy buffer against emerging inflationary risks. “Going forward, we believe CPI inflation may cross the 6.5% mark before dropping to less than 6% in early 2027. Time to build moats through a 25-bps hike in October and Dec MPC each, and then to pause and take stock with upcoming data!” the report said.
India’s retail inflation based on the new Consumer Price Index (CPI) series rose to 4.82 per cent in August 2026 from 4.45 per cent in July, driven by a broad-based increase across most divisions. Rural inflation stood higher at 5.23 per cent compared with 4.31 per cent in urban areas, while food inflation climbed to 5.66 per cent. Core inflation also rose to 4.16 per cent in August from 3.87 per cent in July.
Broadening Inflationary Pressures
More importantly for the monetary policy outlook, SBI Research said inflationary pressures are beginning to spread across a wider basket of goods and services. Its analysis showed that while 22 commodities accounted for 90 per cent of CPI’s weighted contribution in January 2026, the number increased to 51 by August. The contribution of the top 25 commodities, excluding gold and silver, declined to 62 per cent from 83 per cent over the same period.
“Our research of data till Aug’26 indicates that the process of generalisation has started,” SBI Research said.
Projected Inflation Trajectory
The report’s inflation trajectory points to CPI inflation rising from 5.88 per cent in September to 6.70 per cent in October, before moderating to 6.19 per cent in November and 5.64 per cent in December. It is projected at 5.80 per cent in January 2027 and 5.90 per cent in February, according to the chart on page 2 of the report.
External Pressures and Market Impact
Adding to the upside risks is the surge in global crude oil prices amid the widening conflict in West Asia. SBI Research noted that dated Brent was trading higher and touched USD 108 a barrel, while the Indian crude basket had risen sharply from USD 82.04 in July to USD 90.19 in August and USD 109.76 in September. “The crude oil price is expected to stay over $100 per barrel in the near future amid high volatility,” the report said.
Imported inflation was already running substantially above headline inflation, rising 7.75 per cent year-on-year at the all-India level in August compared with headline CPI inflation of 4.82 per cent. SBI Research said the pass-through from higher crude prices remains partial until retail fuel prices are revised, suggesting that some of the impact could still feed through to domestic prices.
Impact on Bond Markets
The inflation challenge is also coinciding with a sharp repricing in global bond markets. SBI Research said India’s benchmark 10-year yield had moved towards 7.10 per cent and could first rise towards 7.25 per cent and subsequently approach 7.50 per cent if supply-side shocks and energy-security concerns worsen. Higher oil prices could simultaneously affect imported inflation, the exchange rate and expectations around the RBI’s policy response.
Liquidity and Policy Stance
On liquidity, however, the report cautioned against aggressive withdrawal by the RBI despite the current surplus in the banking system. SBI Research expects surplus liquidity to decline naturally as strong credit growth absorbs available funds, with system liquidity likely to level out by the end of FY27 if anticipated credit demand materialises.
“Aggressive withdrawal of liquidity may create a deep deficit in Q3 and Q4, which are traditionally better months from the perspective of seasonal demand for credit and cash,” the report said, adding that liquidity management may therefore need to focus on a shorter horizon and be adjusted according to evolving conditions.
Taken together, SBI Research’s assessment points to a calibrated monetary policy response: two 25-bps rate hikes in October and December to address broadening inflation and external price pressures, followed by a pause to assess incoming inflation, crude oil, liquidity and financial-market data. (ANI)
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