RBI Faces Pressure to Hike Rates as Fed Narrows Rate Gap

The Reserve Bank of India (RBI) may face increased pressure to hike interest rates as early as October, following the US Federal Reserve's hawkish stance and narrowing rate gap.

This is according to a research report by Yes Bank, which states that the probability of an RBI rate hike in October has increased, although the central bank's decision will still depend on domestic growth and inflation dynamics.

The report highlights several factors contributing to this pressure, including firm global crude prices, higher headline CPI in August, and a rise in core inflation. However, Yes Bank also notes that the effectiveness of any rate hike could depend on the RBI's ability to absorb surplus liquidity, with the weighted average call rate (WACR) currently at 5.05 per cent.

The hawkish shift by the Fed has changed market expectations, with investors now pricing in another US rate hike this year. The report expects another 25-basis-point rate hike by the Fed in December 2026, citing the central bank's dot plot and its assessment that inflation remains elevated.