SBI Research now expects a 50 basis points RBI jumbo hike to 6% by December, marking a significant escalation from previous brokerage forecasts. The research firm stated that "Peak policy rate poised for 6%... our estimates now point towards a jumbo rate hike of 50 bps," with "a 6% repo rate by December could be the best possible option." The October policy marked a shift from "watchfulness to explicit tightening," with the RBI raising the repo rate by 25 basis points to 5.50% and moving its stance from neutral to calibrated tightening. SBI Research expects inflation to peak at around 6.8% in November 2026, with the policy options now effectively limited to a rate hike or a pause depending on inflation and growth conditions. The report suggests an "agile and tactile" rate response, which could include a jumbo increase of 50 bps "sooner than later," implying not waiting for the next MPC meeting and an off-cycle policy looking like a "sine qua non."
RBI Governor Sanjay Malhotra has confirmed that the banking system's liquidity surplus, driven by heavy FCNR(B) mobilization, is a temporary phenomenon expected to normalize within the current financial year. According to The Hindu BusinessLine, the Governor emphasized that raising the cash reserve ratio (CRR) will be one of the least preferred ways of withdrawing liquidity. System liquidity stood at an average daily surplus of ₹5.9 lakh crore since the last MPC meeting in August 2026, as measured by the net position under the LAF. Malhotra noted that there is more liquidity today than is required, but believes this is not a very long-term phenomenon due to natural factors like currency leakage, reserve requirements of banks, and liquidity draining operations through various central bank operations including spot, sell-buy swaps, OMO, and VRRR. Speaking during the post monetary policy press conference on Wednesday, Malhotra said currency leakage, sell-buy swaps, open market operations (OMOs) and variable rate operations would absorb the excess funds. "We do not expect the surplus liquidity to last for a very long time. So, within this financial year itself, I expect a large amount of this liquidity without giving a number — the currency leakage that happens, the sell-buy swaps that we have already done and are doing, and other tools like OMO and variable rate repo (VRR) that we are using," Malhotra stated.
SBI Research has proposed an asymmetric widening of the liquidity adjustment facility (LAF) corridor as the most effective measure to stabilise financial markets amid global uncertainty. The report stated that "Amidst the other measures suggested, we understand the asymmetric widening of the corridor could be the most effective (as tested in the past times of turbulence in 2013/2020/2022) which the Central Bank has exclusive authority of, by dint of regulatory prescriptions." During the Covid-19 pandemic, the central bank had widened the corridor from 50 basis points to 65 bps on March 27, 2020, by lowering the reverse repo rate while keeping the marginal standing facility (MSF) rate at its usual spread over the repo rate. On April 17, it cut the reverse repo rate further, taking the corridor to 90 bps. The report also suggested tightening the time allowed for exporters to bring in proceeds, with the current period of 15 months cut to six months as a norm, with extensions on a case-by-case basis. Any undue delay should attract some punitive deterrence mechanism, the report added.
Despite the more hawkish inflation stance, the RBI has become more optimistic about economic growth, raising its FY27 GDP growth forecast to 7.1% from 6.7%. The central bank raised its Q2 growth estimate to 7.2% from 6.4%, while the Q3 forecast was increased to 6.9% from 6.5%. The Q4 estimate was retained at 6.8%, while the Q1 FY28 growth forecast was lowered slightly to 7.1% from 7.3%. The repo rate now stands at 5.50%, up from 5.25%, marking the first rate hike since February 2023. The SDF rate is at 5.25%, while the MSF rate and Bank Rate stand at 5.75%. RBI Governor Sanjay Malhotra said rate cuts are off the table in the near term amid external headwinds and rising inflation risks. The RBI has also raised its inflation projections, with FY27 CPI inflation now estimated at 5.2%, compared with 5% previously, with headline CPI inflation rising to 4.82% in August.
Non-deliverable forward (NDF) markets reflect significant stress, with the one-year NDF premium peaking at 4.02% on October 8, while the three-month and one-month premiums hit 1.40% and 0.67% respectively. The dollar index is gaining momentum on expectations of further Fed rate increases and strong US growth, creating additional pressure on the rupee. The narrative has shifted towards managing the currency as much as inflation expectations, with the rupee falling to a five-month low amid debt outflows totalling $2.1 billion in September. SBI Research suggested the government needs to support the RBI by enhancing flows of patient capital in debt and equities by tweaking the tax and capital gains structure. The report also called for a review of the foreign currency export realisation and repatriation period, suggesting that six months should be the norm instead of the current nine months, with longer periods allowed only on a case-by-case basis.
The Indian stock market is expected to remain cautious ahead of the policy announcement, while rate-sensitive stocks could see increased volatility during the session. According to The Economic Times, the weakness in equities is not primarily a reflection of deteriorating domestic activity, but rather investors grappling with a mix of higher crude oil prices above $100 per barrel, rising global bond yields, currency risks and continued foreign selling. The seven-month-old Iran war has pushed crude prices and bond yields higher, bringing inflation and interest rate concerns back into focus. FIIs have remained net sellers for seven consecutive weeks, while the Nifty declined 3.1% last week, with foreign outflows adding to the pressure as foreign capital remains heavily concentrated in largecap stocks. Also Read | Layoffs Are Rising In Tech, But These Skills Are Helping People Unlock Better Pay
