Has the time for a rate hike finally arrived? In retrospect, as we had argued earlier, given global and domestic inflationary trends, a pre-emptive rate hike would have helped (Businessline, August 3 and May 4, 2026). The contours of what lay ahead were becoming increasingly visible through last two quarters.
Three factors have made a rate hike desirable: First, domestic inflationary headwinds, fuelled by global conditions, suggest that a hawkish stance could help. Both CPI and WPI have headed northwards in last four months. Second, given global inflationary trends, it was only a matter of time before Fed raised rates, making "follow the Fed" imperative to prevent capital outflows. Third, given sustained depreciating trend in rupee, brought about by Fll outflows, a higher rate differential could help.
Read more - TATA Trust Fight
However, RBI has so far chosen to keep interest rate unchanged, yet sending somewhat confusing signals through minutes, rate and stance decisions in its Monetary Policy Committee meetings. As for domestic situation, CPI inflation came in at 4.82 per cent in August, up from 4.45 per cent in July, to an eight-month high. As is case with India's inflation story, CPI food and beverage inflation climbed faster reaching 5.66 per cent in August, up from 5.24 per cent reported in July. Onion inflation (over 48 per cent) stood out in this context.
In August 2026, core inflation also crossed 4 per cent, indicating greater pass through and generalised price pressure. Reflecting global price conditions, WPI inflation rose to 9.92 per cent in August 2026, up from 9.78 per cent in July - staying near double digits for past four consecutive months. Crude prices are at over $100/ barrel and likely to continue, and rupee-dollar exchange rate again sniffing 96 thresholds, despite buoyant FCNR inflows. Chart shows usual "three's trouble" dynamics ir crude, rupee and inflation.
Second, US interest rate has been raised by 25 bps, so that sustained pressure on capital outflows is likely to continue. Will MPC consider above developments as 'risks are evenly balanced'? In this context, it is instructive to look at how RBI has responded to inflationary conditions in past.
How many times in last 20 years has central bank raised rates and at what inflation range? As Table shows, average inflation that made RBI raise rates is above 6 per cent, veering close to 6.25 per cent. In each of these tightening episodes, Fed was in hawkish mode. Episodes of repo rate increase in 2018, considered as exceptions, coincide with RBI's adoption of a new monetary policy framework of Flexible Inflation Targeting.
Read more - GST Arrest Powers
Besides those episodes, FIT target of 4 per cent largely seems out of sync with reality for inflation control. Therefore, going by past experience, MPC is unlikely to change repo rate in October 2026 policy on basis of inflation alone - unless Fed rate hike and rupee pressures in its aftermath become dominant. Post Fed hike, rupee has continued to be under pressure, reaching low of 96.30 as of October 5, 2026.
Hawkish stance may help: With domestic credit growth already at a multi-year high and liquidity conditions showing signs of exuberance given expected FCNR flows, a rate hike, or at least a hawkish stance may help. General trend of geopolitical tensions is further intensifying and is likely to remain firm in near term. So are inflationary trends. In this situation, with so many outside vulnerabilities and uncertainties, exchange rate is but one of considerations. Holding on to exchange rate stability through schemes like FCNR(B), which lead to large-scale build-up of future liabilities, is questionable when geopolitical conditions are unpredictable.
Tags: #RBI #RepoRate #MPC #Inflation #CrudeOil #Rupee #FedRate #CPI #WPI