The Reserve Bank of India (RBI) may raise the repo rate twice by the end of December 2026, according to recent analyst expectations. Market participants expect a possible 25 basis point hike in October, followed by another 25 basis point increase in December. If both hikes take place, the repo rate could reach 6% by the end of 2026. One basis point is equal to one-hundredth of a percentage point.
Inflation Pressure Increases
Expectations of a rate hike have increased after India’s retail inflation rose to 4.82% in August 2026 from 4.45% in July. The August figure was higher than economists had expected and was the highest level under the current inflation series. Analysts are also watching food prices and crude oil prices, which could put further pressure on inflation.
Higher crude oil prices are a particular concern because they can increase transportation and production costs and eventually affect consumer prices. Some analysts have warned that inflation could move higher if crude prices remain elevated.
Large Liquidity Surplus in Banking System
Another factor being watched by the RBI is the large surplus liquidity in the banking system. Foreign currency inflows, particularly through FCNR(B) deposits, have added significant rupee liquidity to banks.
According to recent reports, FCNR(B) deposits reached about $127.2 billion by August 31. The overall special foreign exchange measures mobilised around $136.4 billion. The resulting liquidity surplus has been estimated at around ₹10 lakh crore.
RBI Taking Steps to Absorb Excess Liquidity
The RBI has already started using various measures to reduce the excess liquidity in the banking system. These include variable rate reverse repo (VRRR) auctions and open market operations.
In early September, the RBI absorbed more than ₹6 lakh crore through two VRRR auctions as it attempted to manage the surplus funds available with banks.
The central bank may continue using liquidity management measures in the coming months. If inflationary pressures remain strong and excess liquidity continues to support demand, these factors could influence the RBI’s future monetary policy decisions.
Rate Hike Expectations Remain Uncertain
The expected October and December rate hikes are analyst projections and are not decisions announced by the RBI. The central bank’s actual decision will depend on incoming inflation, crude oil prices, liquidity conditions and other economic data.
Earlier in August, several brokerages had expected the RBI to keep the repo rate unchanged through the rest of 2026. The rise in August inflation has since increased expectations of an earlier rate hike.
