The US Federal Reserve's 25-basis-point rate hike to 3.75%-4% on September 17 has put the Reserve Bank of India's October monetary policy review firmly in focus, with economists increasingly expecting a change in India's monetary policy stance. According to Essay Business Intelligence, Madhavi Arora from Emkay Global Financial Services sees a 25-bps October hike becoming more likely, expecting any subsequent tightening cycle to remain relatively shallow at 50-75 basis points. The market is already pricing in a 75 to 100 basis point rate hike at the prevailing market yields of corporate and government securities, as noted by Murthy Nagarajan from Tata Asset Management. However, economists remain divided on timing, with some expecting a hike in October while others anticipate waiting until December or later. Nilesh Shah from Kotak Mahindra Asset Management is among those who see scope for a hike, noting that "with inflation on an upward trajectory, albeit still within the RBI's target range, the central bank may look to raise policy rates." Deepak Agrawal, chief investment officer of debt and head products at Kotak Mutual Fund, said in a note that "rising crude and inflation along with increasing global rates may also guide the India MPC to raise rates by 50 bps."
Wood identified the AI supercycle as dominating Indian markets, though he flagged concerns around the monetisation of capital expenditure linked to artificial intelligence and semiconductors. As reported by NDTV Profit, he warned that "a lot of AI, semicon capex may not get monetised," while noting that IT services companies are witnessing a structural re-rating. The analyst also highlighted that private-sector participation in the energy space has increased, pointing to a broader shift in the sector. This AI-driven investment cycle continues to influence market dynamics alongside traditional sectors.
Crude oil above $100 a barrel, rising global yields and a large domestic liquidity surplus have strengthened the case for an earlier rate move. As reported by NDTV Profit, Wood noted that Indian markets are clearly focused on crude price movements, with oil prices having not risen as much as expected despite a prolonged war. The November futures of Brent crude was nearly $106 per barrel, still up 45% from pre-war level, with the war in West Asia continuing to escalate and pushing crude oil prices higher. Retail inflation has risen to 4.82% in August, while core inflation has also started gaining momentum, leaving policymakers with less justification for another rate cut and a stronger reason to keep the option of tightening open. Wholesale inflation has risen sharply on the back of higher fuel and power prices, creating additional pressure for monetary policy action. Brent crude remains above $108 per barrel, adding to imported inflation concerns, with the depreciation of the rupee further compounding these pressures.
The rupee is hovering around the 96-per-dollar mark, US 10-year Treasury yields have crossed 5%, and Brent crude remains above $108 per barrel, creating a difficult trade-off for the RBI. According to Bank of Baroda economist Dipanwita Mazumdar, the 10-year government bond yield is around 7.05%, close to a four-month high, with further upside pressure expected if US 10-year yields remain elevated. Banking-system liquidity is likely to remain in surplus even after rate hikes, though the central bank has been using Variable Rate Reverse Repo (VRRR) auctions and Open Market Operations (OMOs) to drain excess funds. Dipti Deshpande from CRISIL expects the RBI to begin raising rates in October, citing rising inflation and excess liquidity, while noting that raising rates primarily to defend the currency could hurt growth and widen fiscal deficits. Rajeev Sharan from Brickwork Ratings expects the RBI to hold the repo rate at 5.25% and maintain a watchful stance, noting that "a rate reduction looks unlikely until the external picture, the rupee, oil and global rates, turns more favourable."
