The Reserve Bank of India (RBI) may be preparing for another round of interest rate hikes.
According to a report by Union Bank of India, the RBI could raise the repo rate to 5.75%-6% in the second half of FY27.
The current repo rate stands at 5.25%.
The bank expects the RBI to increase the rate by 25 basis points two or three times, with the first hike potentially coming in December 2026.
Why Is the RBI Considering a Rate Hike?
A major concern for the RBI is the sharp rise in liquidity in the banking system.
Foreign exchange inflows through the RBI’s special swap facility have reached around $136 billion as of August 31.
Most of this money, around $127.23 billion, has come through FCNR(B) deposits.
The remaining amount has come through overseas foreign currency borrowings and external commercial borrowings.
This has added a large amount of money to the banking system.
Core liquidity increased from around ₹4.82 lakh crore in mid-June to ₹8.05 lakh crore by mid-August.
RBI May Take Steps to Absorb Extra Money
The report estimates that core liquidity could rise further to around ₹14.17 lakh crore by September 11.
This could make liquidity management a major challenge for the RBI.
Before its October policy meeting, the central bank may introduce measures to remove some of this excess liquidity from the banking system.
Possible steps include Variable Rate Reverse Repo (VRRR) operations for both short and longer periods.
The RBI could also consider increasing the Incremental Cash Reserve Ratio (I-CRR).
Bond sales and foreign exchange swaps are other options that could be used to absorb excess liquidity.
Could the Repo Rate Rise as Early as October?
While December is currently seen as the more likely starting point for rate hikes, an October increase cannot be completely ruled out.
According to the report, this could happen if the US Federal Reserve raises interest rates in September and the RBI first takes stronger steps to control excess liquidity.
For now, the RBI may prefer temporary measures that can be reversed later if credit demand becomes stronger.
The Union Bank report expects a combination of short-term and longer-duration measures to manage the expected surplus liquidity.
If the rate hike cycle begins, borrowers could eventually face higher loan costs, while savers may see better returns on some fixed-income products.
