New Delhi, Sep 4: The Reserve Bank of India (RBI) could return to a rate-hiking cycle later this year, with the repo rate potentially rising to 5.75-6 per cent in the second half of FY27, according to a report by Union Bank of India (UBI).
The report expects the rate-hike cycle to begin around December, although an earlier move cannot be completely ruled out. UBI estimates that the RBI could raise the repo rate by 25 basis points in two or three stages from the current 5.25 per cent.
A major factor behind the outlook is the sharp increase in liquidity across the banking system. Large foreign exchange inflows have added substantial rupee liquidity, making liquidity management an increasingly important challenge for the central bank.
According to UBI, core liquidity in the banking system increased from around Rs 4.82 lakh crore in mid-June to Rs 8.05 lakh crore by mid-August. The report estimates that liquidity could rise further in the near term if the current trend continues.
The increase has been linked largely to foreign exchange inflows under the RBI’s special dollar deposit scheme. The inflows have created a situation where the central bank may need to absorb excess rupee liquidity to prevent it from adding to inflationary pressures.
Before raising the repo rate, the RBI is expected to focus on managing this surplus liquidity. UBI expects the central bank could use tools such as variable rate reverse repo operations and incremental cash reserve requirements. Longer-term measures, including bond sales and foreign exchange swaps, could also be considered if necessary.
The timing of any rate increase will also depend on how the economy and inflation perform in the coming months. India’s strong economic growth could give the RBI greater room to tighten policy if price pressures begin to build.
Global developments will remain another important factor. Movements in US interest rates, crude oil prices, the rupee and global financial conditions could influence the RBI’s decision.
UBI said temporary liquidity-management measures could initially be preferred, particularly if the RBI expects the surplus liquidity to ease as credit demand picks up during the second half of FY27.
For borrowers and businesses, a return to rate hikes would be important because higher policy rates can eventually increase borrowing costs. Banks, investors and businesses are therefore likely to closely watch upcoming RBI policy decisions and inflation data.
For now, the RBI remains focused on balancing economic growth with price stability and financial-system liquidity. UBI’s assessment suggests that December could mark a potential turning point in India’s interest-rate cycle, provided inflation and liquidity conditions continue to warrant tighter monetary policy.
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