A shallow rate hike should serve many purposes at this juncture, most important building confidence in agility of the RBI. Also, it can go a long way in RBI leading the way in setting the course, and tone for others (read Developed Markets) to follow,” the ERD said in a report.
Just one month back there was practically not much talk of rate hikes, and majority (if not all) expected a “prolonged pause”, opined ERD officials. But the situation has changed drastically since then.
“Now, we strongly advocate a 25-bps rate hike in the upcoming October policy (followed by another in December in quick succession), factoring the myriad evolving “undershoots”… Our rate hike call is agnostic to August CPI inflation print that could come around 4.8-4.9 per cent. If oil prices remain at high levels, inflation print for October and November should move towards 6.5 per cent or higher,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, in the report.
Rising crude oil prices
Referring to crude prices recently crossing the $100/barrel (bbl) mark amid heightened geopolitical uncertainties, the ERD’s results from the quantile regression indicates that at 60th quantile over the next 15-days the prices can reach $123 / bbl.The ERD officials said that CPI inflation is showing incipient signs of generalization. Moreover, the risk of further generalization is particularly pronounced in sectors where input prices are currently rising faster than output prices, suggesting that the pass through has not been enough on producer’s side, evident in crude petroleum & natural gas, beverages, pharmaceuticals, electronics etc.
“Going forward this could result in greater pass-through from producer prices to final prices especially in case of crude petroleum & natural gas as its imported share of 31.3 per cent. This provides a case for a rate hike now, followed by another in December (Total 50 bps as a moat),” Ghosh said.
The ERD officials observed that globally, yields are inching past decadal highs surefootedly. A notable offshoot is the vaulting US yields, 10 Year within striking distance of 5 per cent now (something unthinkable by majority of markets till a few days back) while 30Y has pulled back towards 5.40 per cent, after a short-lived reprieve emanating from the Treasury Department’s attempts to smoothen the longer end of the curve through elevated repurchases.
“With US PPI (Producer Price Index)up 0.4 per cent in August (up 5.4 per cent for the 12 months ended in August ‘26 while core PPI too is 4.6 per cent), markets are reading between the lines of CPI (All Urban Consumers), which rose 0.4 percent, seasonally adjusted (SA), further having a bearing on Fed’s rate hike probability (71 per cent now) though the Fed may still toy with other measures for now,” Ghosh said.
Back home, with benchmark Indian yields crossing 7 per cent today (last seen on June 3 this year), ERD officials believe domestic liquidity can support the front end to some extent though not necessarily eliminating long-end pressure as an oil shock can work through several channels simultaneously.
“That essentially can checkmate the Mint Street strategy to keep volatility low and borrowing costs in check, signaling 10Y yields to travel some more miles (10-15 bps), testing the May/March highs first but not limiting themselves there. We believe 10 year yields should move up towards 7.15 per cent or even higher tracking multiple cues,” Ghosh said.
SBI’s Group CEA said the liquidity bulge in the banking system looks more short-term in nature, tapering during the forthcoming the festive season and should be absorbed optimally within the next 3/4 months rendering RBI to find it less plausible to implement structural measures such as cash reserve ratio or Market Stabilisation Scheme/Open Market Operation (the last resort ideally going by today’s numbers and response) operations.
Also, going by the logic that RBI has concentrated more on OMOs targeting the short end of the curve, there is a fair likelihood of its tilting towards a possible rate hike should the brawl come to a fight.
Published on September 11, 2026