The US Federal Reserve’s latest interest rate hike has intensified the debate over whether the Reserve Bank of India could also shift towards monetary tightening in the coming months.
While the Fed raised rates by 25 basis points as widely expected, its latest projections indicated that policymakers still see the possibility of another hike this year.
For India, the development comes at a time when the rupee remains under pressure, crude oil prices are elevated and domestic inflation is moving higher. Against this backdrop, some analysts have started factoring in RBI rate hikes in October and December, although others expect the central bank to remain on hold in the near term.
According to the latest assessment, the Fed’s move and its dot plot have strengthened the case for 50 basis points of RBI tightening in calendar year 2026, potentially split between the October and December policy meetings.
US Fed raise rates
The US Fed raised the federal funds rate by 25 basis points to a target range of 3.75%-4%, following four consecutive meetings in which policymakers had kept rates unchanged. The decision was unanimous and reflected continued concerns over inflation, with the central bank seeing limited evidence of a meaningful slowdown in price pressures.
The Fed remains focused on bringing inflation back towards its 2% target. Its new quarterly projections also showed that policymakers see scope for one more rate hike this year, followed by a hold in 2027.
The latest increase marked the first US rate hike since July 26, 2023, when the Federal Reserve had last increased its benchmark federal funds target range by 25 basis points.
Will RBI hike rates in October?
The US Federal Reserve’s latest interest rate decision has turned the spotlight towards India’s monetary policy outlook, with investors closely watching how the Reserve Bank of India responds to changing global conditions.
According to Axis Capital, the Fed’s move had complicated the RBI’s policy calculations and brought another rate increase into consideration. The brokerage expected the RBI to raise rates in October and December, while noting that the timing would depend on incoming inflation data and external-sector developments.
“We expect the RBI to deliver rate hikes in October and December. The Fed’s latest move has complicated the policy calculus, bringing a third hike firmly into play, although when it materializes will depend on incoming inflation and external-sector dynamics,” Axis Capital said.
Axis Capital also expected the overall RBI hiking cycle to be limited to 75 basis points.
However, any tightening cycle is likely to begin with liquidity normalization (link). Excess liquidity generated by FCNR(B) inflows has pushed overnight rates roughly 50bp below the policy rate, weakening the effective stance of monetary policy, it added.
Meanwhile, Choice Broking also saw a shift away from the extended-pause scenario. The brokerage argued that the combination of rate hikes by the Fed and Bank of Japan, a narrowing interest-rate differential, CPI approaching 5% and moving towards 6%, and increasingly negative real rates had changed the policy backdrop.
“We expect a pivot toward a meaningfully positive real rate, repo nearer 6.5%, with the early-October meeting the first place to watch,” said the brokerage.
However, not all analysts expected the RBI to begin raising rates immediately.
Rajeev Sharan, Head of Research at Brickwork Ratings, said the immediate implications for India were likely to be visible through bond yields and the rupee. Sharan highlighted that US 10-year yields had breached 5%, while the rupee was hovering close to the 96 mark. He added that the depreciation of the currency, combined with Brent crude remaining above USD 108 per barrel, could worsen imported inflation and push domestic bond yields higher.
“Going into the October review, we expect RBI to hold the repo rate at 5.25% and maintain a watchful stance. A rate reduction looks unlikely until the external picture, the rupee, oil and global rates, turns more favourable, and if these pressures persist, a prolonged pause, and even a tightening bias, cannot be ruled out,” he added.
The Fed’s latest decision therefore adds another variable to an already closely watched policy outlook. For Indian markets, the direction of the rupee, crude oil prices, domestic CPI inflation, liquidity conditions and global bond yields are likely to remain key factors in determining whether the RBI eventually follows the Fed with a rate-hiking cycle.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
