Global Rate Hike Cycle Underway: India May See 75-100 Bps Rate Hikes
Major central banks have started raising interest rates globally, marking the beginning of a new rate hike cycle. The US Federal Reserve, European Central Bank, and Bank of Japan all increased rates in September, while the Bank of England kept its rate unchanged but maintained a cautious stance.
The global economy is shifting towards tighter financial conditions, with higher interest rates and bond yields making borrowing more expensive. India's 10-year government bond yield has risen to around 7%, and MOFSL expects it to remain in the 7.0-7.2% range for the rest of FY27.
The report warns that rising inflation risks are emerging in India, with food inflation close to 6%. Higher oil prices could increase transportation and other input costs, pushing retail inflation above 6% in Q3 FY27. MOFSL retains its FY27 inflation forecast at 5.1%, slightly above the RBI's 5% projection.
In this scenario, the Reserve Bank of India (RBI) might consider raising interest rates if crude oil prices remain high and inflation expectations increase. Under a sustained oil shock, MOFSL sees the possibility of 75-100 basis points of cumulative rate hikes in the current cycle.