RBI's New Rate-Hike Cycle: Report Sees 75 to 100 Basis Points of Tightening as Inflation Rises
A report by SBI Capital Markets (the investment banking arm of the State Bank of India) expects the Reserve Bank of India (RBI) to raise the repo rate by a total of 75 to 100 basis points (0.75 to 1 percentage point) in the current rate-hike cycle.
The report says a bigger hike in December 2026 is possible, depending on inflation (price rise) data. The next Monetary Policy Committee (MPC) meeting is scheduled for 2 to 4 December 2026.
The cycle began on 7 October 2026, when the MPC raised the repo rate by 25 basis points, from 5.25% to 5.50%, and changed its stance from "neutral" to "calibrated tightening". This was the first hike after the RBI cut rates by a total of 125 basis points between February and December 2025.
The report expects retail inflation to peak in Q3 FY27 (October to December 2026) and then ease. The RBI itself projects CPI inflation at 5.2% for 2026-27, and about 6.0% in Q3, above the 4% target.
It warns that high crude oil prices, geopolitical tensions (conflicts between countries) and rising borrowing costs could reduce household spending.
Higher rates may help bank margins (the gap between what banks earn on loans and pay on deposits) in FY27, while bonds could again attract investors in FY28, once rates stop rising.
Monetary Policy Committee (MPC): How RBI Sets the Repo Rate
The Monetary Policy Committee (MPC) is a six-member body that decides India's main interest rate, the repo rate. The repo rate is the rate at which the RBI lends short-term money to banks. When the MPC raises it, loans across the country slowly become costlier, people borrow and spend less, and price rise cools down. The MPC must keep inflation close to a target set by the government.
The SBI Capital Markets report is a forecast of how far the MPC will go in this new tightening cycle. A total of 75 to 100 bps means three or four hikes of 25 bps each (or fewer, larger steps), counting the October hike.
Flexible Inflation Targeting (FIT) Framework
Flexible Inflation Targeting (FIT) is the system under which the RBI's main job is to keep retail inflation close to a number fixed by the government. In India, the target is 4%, measured by the Consumer Price Index (CPI), with a band of 2% to 6%. It is "flexible" because the RBI may also keep economic growth in mind. If inflation stays outside the band for three quarters in a row, the RBI has failed and must explain why to the government.
Projected inflation of about 6% in Q3 sits at the very top edge of the 2% to 6% band. Rate hikes now try to stop inflation from crossing the band and staying there, which would count as a failure of the target.
Bond Prices and Bond Yields: The Inverse Relationship
A bond is a loan that an investor gives to a government or a company. In return, the borrower pays a fixed interest every year and returns the full amount at the end. The yield is the actual return an investor earns on a bond, based on the price paid for it. The most important rule of the bond market is simple: when bond prices go up, yields go down, and when bond prices go down, yields go up. This "see-saw" link explains why interest-rate changes by the RBI move bond markets, bank profits and government borrowing costs.
As the RBI raises the repo rate, bond yields rise and bond prices fall, so bonds look unattractive in FY27 and banks face losses on their holdings even as their loan margins improve. The report expects bonds to regain interest in FY28 because, once the rate-hike cycle peaks, investors can lock in high yields and gain if rates later fall.
- SBI Capital Markets report: total repo hikes of 75 to 100 bps expected in the current cycle; a larger hike possible in December 2026
- Repo rate raised 25 bps to 5.50% on 7 October 2026 (63rd MPC meeting); SDF 5.25%; MSF and Bank Rate 5.75%
- MPC stance changed from neutral to calibrated tightening
- RBI CPI projections: 5.2% for 2026-27; Q3 6.0%; Q4 5.7%; Q1 2027-28 5.6%
- RBI GDP growth projection for 2026-27: 7.1%
- CPI inflation in August 2026: 4.8% (July: 4.5%)
- Inflation target: 4% (band 2% to 6%), retained for April 2026 to March 2031
- Next MPC meeting: 2 to 4 December 2026
- Previous easing: repo cut by 125 bps in total, February to December 2025, to 5.25%