SBI Research Flags 6.5% Inflation Risk, Urges RBI To Raise Rates

The Reserve Bank of India may have to reverse its recent wait-and-watch approach on interest rates if high crude prices and wider inflation pressures persist, according to SBI Research, which has called for two 25-basis-point rate hikes over the coming months.

In its latest Ecowrap report, SBI Research recommended a 25-bps increase in the repo rate in October, followed by another hike in December. The recommendation comes at a time when global energy prices and geopolitical tensions have created fresh uncertainty for the Indian economy.

The RBI’s Monetary Policy Committee is scheduled to meet from October 5 to 7. At its August meeting, the central bank kept the repo rate unchanged at 5.25 per cent, marking the fourth consecutive policy meeting without a change.

SBI Research said the outlook had shifted sharply in just a month. Expectations had earlier favoured a prolonged pause, but crude oil prices have since climbed above USD 100 a barrel. The report warned that prices could rise further, estimating that crude could touch USD 123 a barrel over the next 15 days if geopolitical tensions remain elevated.

The concern is not limited to fuel costs. SBI Research said retail inflation is showing early signs of becoming broader, with rising input costs in areas such as petroleum and natural gas, beverages, pharmaceuticals and electronics. It also pointed to higher prices of onions, edible oil and LPG as factors pushing up restaurant inflation.

The report argued that waiting for all these higher costs to reach consumers before acting could leave the RBI responding too late. If crude remains expensive, inflation readings for October and November could move towards 6.5 per cent or higher, it said.

SBI Research also noted that large FCNR(B) inflows, estimated at about USD 127 billion, have increased banks’ lending resources and created surplus liquidity. However, strong credit demand could gradually absorb this excess liquidity by the end of the financial year.

Importantly, SBI said its rate-hike recommendation is independent of any expected US Federal Reserve action. The final decision, however, rests with the RBI’s MPC, which will have to balance inflation risks against economic growth and credit conditions.