RBI likely to start rate hikes; repo could reach 6% by FY27-end

The Reserve Bank of India is expected to raise the repo rate by 25 basis points in October, with further hikes likely during FY27 as inflation risks persist, potentially pushing the benchmark rate to 5.75-6 per cent, according to a report by Union Bank of India. The lender noted that Indian government bonds remained under pressure in September as high crude oil prices and rising global yields strengthened expectations of RBI rate hikes.

The pressure on bonds was particularly visible in the 5-year segment, where yields rose 45 basis points in September compared with 24 basis points for the 10-year, narrowing the 10-year minus 5-year spread from 36 to 16 basis points. Higher domestic bond supply, including RBI open market operation sales and increased long-tenor issuance in the second-half borrowing calendar, added to the pressure and kept yields elevated despite lower overall government borrowing. The government plans gross dated G-Sec borrowing of Rs 7.86 lakh crore in H2FY27, while higher T-bill issuance and moderately higher state borrowing are also expected to add to market supply.

Union Bank of India expects one or two additional hikes during the remainder of FY27 following the October rate hike, accompanied by hawkish guidance signalling continued vigilance on inflation. A broad-based cash reserve ratio hike appears unlikely, given the RBI's earlier decision to exempt eligible FCNR(B) deposits from reserve requirements. The central bank continues to absorb the FCNR(B)-led surplus through variable rate reverse repo auctions and open market operation sales, which totalled Rs 1 lakh crore across three September auctions.