RBI Weighs Up to 100bps Rate Hike Amid Oil Price Pressures

The Reserve Bank of India (RBI) may raise interest rates by 75-100 basis points in response to persistent oil and inflation pressures, according to a report by Motilal Oswal Financial Services. The brokerage firm suggests that an October rate hike is a possibility if crude prices remain high and inflation expectations rise.

The report notes that Brent crude has fallen to around $103 a barrel from earlier highs above $108-110, but remains elevated, posing risks to inflation and India's external balance. Food inflation is close to 6% and WPI inflation is near 10%, putting pressure on CPI inflation, which is expected to rise above 6% in the third quarter of FY27.

Motilal Oswal also attributes the shift towards tighter monetary policy globally to persistent inflation, elevated public debt, large fiscal deficits, and monetary aggregates that remain substantially above pre-Covid levels. The US Federal Reserve raised its policy rate by 25 basis points in September, taking the federal funds target range to 3.75-4%, while other major central banks have also moved towards tighter policy.

The impact of higher interest rates is likely to vary across sectors, with banks potentially benefiting from repricing floating-rate assets, while NBFCs, real estate, automobile companies, consumer durables, and highly leveraged businesses may come under greater pressure. Export-oriented IT and pharmaceutical companies may see some support from a weaker rupee, but the IT sector remains vulnerable to slower global technology spending.