SBI Research sees case for two RBI rate hikes as oil prices threaten inflation

The Reserve Bank of India (RBI) may need to raise its policy rate by 25 basis points each in October and December as elevated global crude prices and emerging signs of broader inflationary pressure increase the risks to the domestic price outlook, according to a new SBI Research report.

The report has called for a cumulative 50-basis-point tightening, arguing that waiting for inflationary pressures to become more widespread could make it harder for the central bank to contain them later.

SBI Research said its recommendation is not dependent on the August Consumer Price Index (CPI) reading, which it expects to come in at around 4.8-4.9 per cent. However, it warned that a sustained rise in crude prices could push consumer inflation significantly higher in October and November, potentially towards 6.5 per cent or above.

Global crude oil prices have recently moved above $100 a barrel amid heightened geopolitical tensions. The report said prices could climb as high as $123 a barrel over the next 15 days if the current pressures persist.

A sustained oil shock would have implications beyond fuel prices, as higher energy costs can feed into transportation, manufacturing and other parts of the economy. SBI Research also pointed to increasing pass-through risks from producer prices to consumers in sectors including crude petroleum and natural gas, beverages, pharmaceuticals and electronics.

The report said consumer inflation was showing "incipient signs of generalisation", suggesting that price pressures could gradually spread beyond a limited number of categories.

Against this backdrop, the report said a total rate increase of 50 basis points would provide a pre-emptive response to the emerging risks.

On liquidity conditions, SBI Research said the recent mobilisation of funds was broadly in line with the funding requirements of the banking system. It expects the current spike in liquidity to gradually ease as stronger credit demand absorbs excess funds.

The report linked this expected adjustment to robust first-quarter FY27 GDP growth and said system liquidity could normalise by the end of FY27 if credit demand develops as anticipated.

SBI Research estimated that excess system liquidity could gradually decline through the remainder of FY27 and ideally stand at around Rs 6 lakh crore by March 2027.

The report also expects India's 10-year benchmark government bond yield to move towards 7.15 per cent or potentially higher, reflecting a combination of domestic and global factors.

Global bond yields are also moving higher, with US Treasury yields approaching levels not seen in more than a decade. The US 10-year yield is nearing 5 per cent, while the 30-year yield has moved back towards 5.40 per cent.

Higher global yields could add further pressure to domestic bond yields and complicate the RBI's policy choices as it balances inflation risks, liquidity conditions and economic growth.