The Reserve Bank of India (RBI) may raise the repo rate to 6 percent by April 2027 amid complex conditions in the Indian economy, according to a report by leading financial services firm Bandhan AMC. The report, released Friday, stated that this increase would be necessary to establish a stable monetary policy given the excess liquidity that has built up in the markets and rising inflationary pressures.
The report analyzed that Indian fixed income investors are navigating a complex environment shaped by two opposing forces — rising inflation on one hand, and excess liquidity created by large inflows of rupee funds through foreign investments on the other. It noted that this excess cash flow has caused overnight interest rates to fall well below the RBI’s policy rate, and that the RBI will need to step in soon to correct this imbalance.
The report opined that the future depends on how quickly the RBI acts to normalize the situation. It anticipated measures such as realigning overnight rates back with the policy rate, reducing the medium-term excess liquidity, and the Monetary Policy Committee (MPC) deciding on a repo rate hike with inflation in mind. Market circles are also expecting steps such as FX swaps, MSS bonds, open market operation (OMO) sales, and, if needed, an increase in the Cash Reserve Ratio (CRR).
The report noted that international factors — including rising fuel prices amid renewed tensions in the Middle East and pressure on prices of other commodities, including agricultural produce — are fueling inflation. It further explained that domestic conditions, such as an erratic monsoon, strong GDP growth, and credit growth running at around 18 percent, are also adding to inflationary pressures.
While the data released so far has offered the RBI some relief, the report noted that the minutes of the recent Monetary Policy Committee meeting signal that members’ stance is turning more hawkish. It assessed that discomfort is growing among MPC members over the current policy stance as price pressures intensify globally.