State Bank of India (SBI) Research now anticipates a more modest 25 basis point (bps) interest rate hike from the Reserve Bank of India (RBI) at its December Monetary Policy Committee (MPC) meeting. This revised outlook, detailed in its latest Ecowrap report dated November 12, comes even as India's retail inflation soared to 6.09% in October, surpassing the RBI's upper tolerance limit.
Factors Influencing SBI's Revised RBI Rate Hike Forecast
The shift in SBI Research's prediction from an earlier 50 bps hike is attributed to several key domestic and international developments that suggest a more measured policy response is warranted. Four primary factors underpin this revised forecast:
- Rupee Stability and Liquidity: Recent efforts by the RBI to stabilize the Indian rupee and ease liquidity pressures have shown positive results, with the currency recovering against the dollar and overnight money market rates moderating.
- Improving Foreign Capital Inflows: A significant increase in foreign institutional investment (FII) inflows, approximately $7.68 billion since November 4, has contributed to rupee appreciation and reduced currency pressure.
- Softer Crude Oil Prices: Easing geopolitical tensions have led to an approximate 11% decline in Brent crude prices following the US elections, potentially alleviating India's imported inflation burden.
- Expected Softening Global Yields: SBI anticipates a softening in US Treasury yields, with the 10-year benchmark potentially moving towards 4.75%, which could influence Indian government bond yields to settle around 6.75–7%.
Inflation Concerns Persist Amidst External Improvements
Despite the more favorable external environment, domestic inflation pressures remain a significant concern. October saw food and beverages inflation hit 8.51%, with consumer food price inflation rising to 8.94% from 7.74% in September. Specific price surges were noted in onions (116.22%), garlic (60.74%), ginger (48.32%), and lemons (47.3%).
Economists like Upasna Bhardwaj of Kotak Mahindra Bank project inflation to stay above 6% in the near term, citing adverse base effects, elevated food prices, and commodity cost pressures. Madan Sabnavis from Bank of Baroda suggests the RBI might still consider a 25–50 bps hike as inflation becomes increasingly broad-based.
Potential Peak for Repo Rate
SBI Research projects inflation to reach around 6.3% in November before a potential moderation. Significantly, the report now assigns equal probabilities to the terminal repo rate settling at 6% or a slightly lower 5.75%. Furthermore, it argues against another rate hike in February 2027, advocating for a data-dependent approach post-December.
For borrowers, this revised forecast offers a glimmer of hope for a smaller increase in lending rates than previously expected, though actual borrowing costs will ultimately hinge on the RBI's decision and how banks transmit policy changes.