By Jaspreet Kalra
MUMBAI, October 5 (Reuters) - Investors have loaded up on bets that the Reserve Bank of India will raise rates this week, warning that it risks falling behind the curve as inflation quickens, growth remains resilient and major central banks turn more hawkish.
Nearly 60% of economists polled by Reuters, 35 out of 61, expect a 25-basis-point rate hike at its policy meeting on Wednesday. Market pricing is more decisive with swap markets fully pricing in an increase in borrowing costs.
If delivered, the hike would be the RBI's first in nearly four years and lift the benchmark repo rate from 5.25% where it has remained for nearly 10 months. The Monetary Policy Committee cut rates by a cumulative 125 bps in 2025 from 6.5% to 5.25%.
"We now sense that the RBI has little reason to wait, given visibility of growth remains high, inflation appears to be broadening, and the need to wait for clarity on the global front declines," said Rahul Bajoria, India and ASEAN economist at BofA Global Research.
Bajoria expects the central bank to kick off a 100-basis-point tightening cycle in October.
"This essentially is no longer just about reversing the incremental cut that the RBI had delivered last December but actually taking away the monetary punchbowl before inflation risks become entrenched," he said.
With inflation running above the RBI's target and markets already pricing in higher borrowing costs, the central bank's decision and guidance are likely to shape expectations for the path of interest rates and capital flows.
A benign inflation backdrop early in the year had given the RBI room to wait even as the Iran war sparked a surge in oil prices, but inflationary pressures have since broadened beyond food and fuel.
Consumer inflation picked up in August to 4.82%, above the RBI's 4% medium-term target for a third consecutive month, with prices across nearly half of the CPI basket rising at or above the target. The economy grew 7.8% in the April-June quarter.
HOLD MAY DRAW PUSHBACK
Several major central banks, including the US Federal Reserve and Bank of Japan, have raised rates since the US-Israeli war on Iran began seven months ago. Traders and analysts now expect the RBI to follow suit, warning that pushback may be in store if rates are maintained.
"A hold will not be taken positively by the currency market and even the long end of the bond market may face some pressure," said Vivek Rajpal, Asia macro strategist at JB Drax Honore, adding that the RBI will also need to signal openness to raising rates further if needed.
The rupee remains under pressure, about 1% off record lows hit in May.
"India needs to act on multiple fronts and going to a neutral rate is part of the solution," he added, pointing to how inflation-adjusted interest rates in India remain quite low at a time when price pressures have deepened and global competition for capital has intensified.
Higher rates could also make Indian bonds more attractive to foreign investors at a time when domestic stocks continue to struggle without clear AI opportunities.
HIKE, BUT HOW MUCH?
Economists at Nomura and Barclays have penciled in a shallow hike cycle of 25-50 bps while BofA and ANZ anticipate between 75 and 100 bps of rate increases.
Swap markets are pricing about 100 bps worth of hikes over the next 12 months and about 140 bps over the next 24 months.
BofA's Bajoria reckons the RBI may not want to commit to a longer hiking cycle in October itself, but could be open to doing so in December.
That would put the focus on any changes to the RBI's inflation and growth forecasts, as well as whether it changes its "neutral" policy stance, for clues on how far policymakers are prepared to take the tightening cycle.
(Reporting by Jaspreet Kalra; Editing by Jacqueline Wong)
