RBI could hike rates by 75-100 bps amid persistent oil and inflation pressures: Report

New Delhi: India could face cumulative interest rate hikes of 75-100 basis points if crude oil prices remain elevated, brokerage firm Motilal Oswal Financial Services said in a research report, as major central banks move towards tighter monetary policy after years of relatively easy financial conditions.

The brokerage said an October rate hike by the Reserve Bank of India (RBI) is a meaningful possibility if crude prices stay high and inflation expectations start rising. It maintained its forecast for the 10-year Indian government bond yield at 7.0-7.2 per cent through the rest of FY27 and projected FY27 CPI inflation at 5.1 per cent, marginally above the RBI's 5 per cent projection.

Also read | Gold rate today, September 21: Check latest 24K and 22K prices in major cities

Brent crude has fallen to around USD 103 a barrel from more than USD 108-110 earlier in the week, but remains elevated, posing risks to inflation as well as India's external balance, the report said.

The brokerage noted that food inflation is close to 6 per cent and WPI inflation is near 10 per cent. It expects the combined pressure from food and energy prices to push CPI inflation above 6 per cent in the third quarter of FY27.

According to Motilal Oswal, financial conditions in India are already tightening even before the start of a formal repo-rate hiking cycle. It cited the RBI's liquidity absorption through variable rate reverse repo operations (VRRR), open market operation (OMO) sales, rising domestic bond yields and tighter global financial conditions.

The report said the US Federal Reserve raised its policy rate by 25 basis points in September, taking the federal funds target range to 3.75-4 per cent. The European Central Bank and Bank of Japan have also moved towards tighter policy, while the Bank of England kept its rate unchanged but delivered a hawkish vote.

Also read | US Fed raises interest rates for first time since 2023 despite Trump’s calls for cuts

Motilal Oswal attributed the broader shift towards tighter monetary policy to persistent inflation, elevated public debt, large fiscal deficits and monetary aggregates that remain substantially above pre-Covid levels.

US 10-year Treasury yields have moved close to 5 per cent, while India's 10-year government bond yield has climbed above 7 per cent, the brokerage said.

The impact of higher interest rates is likely to vary across sectors. Banks could initially benefit as floating-rate assets reprice, while NBFCs, real estate, automobile companies, consumer durables and highly leveraged businesses could come under greater pressure from rising funding costs.

Export-oriented information technology and pharmaceutical companies could get some support from a weaker rupee, although the IT sector remains vulnerable to slower global technology spending.

Motilal Oswal expects the global economy to move away from an era of abundant and inexpensive capital towards a period of tighter and more costly money. In such an environment, balance-sheet strength, dependence on refinancing and pricing power are expected to become increasingly important factors for businesses.