The Reserve Bank of India (RBI) could increase the repo rate by 75 to 100 basis points during the current monetary tightening cycle, according to a report by SBI Capital Markets. Inflation is expected to remain elevated in the near term before gradually easing from the next financial year. The brokerage said gradual rate increases remain the most likely scenario, although a larger hike in December 2026 cannot be ruled out. The RBI’s future decisions will depend partly on inflation readings for September and October, which are expected to provide a clearer picture of price pressures and the direction of monetary policy.

The report highlighted the Monetary Policy Committee’s recent 25-basis-point repo rate hike and its shift in stance from “Neutral” to “Calibrated Tightening”. According to SBI Capital Markets, these changes indicate a stronger emphasis on controlling inflation. The brokerage expects the policy cycle to begin turning in the first quarter of FY28 as the balance between economic growth and inflation evolves. Consumer inflation is projected to peak in the third quarter of FY27, while wholesale price inflation could start easing from March 2027 due to favourable base effects. Consumer price inflation is also expected to remain below 5 per cent year-on-year beyond the first quarter of FY28.

India’s economic growth has remained strong despite inflationary pressures and uncertainty in global financial markets. Real gross domestic product expanded by 7.8 per cent year-on-year in the first quarter of FY27, exceeding market expectations of 7.1 per cent. Manufacturing recorded growth of 9.2 per cent, while gross fixed capital formation increased by 11.9 per cent during the same period. These figures point to continued activity in production and investment. However, SBI Capital Markets warned that higher borrowing costs could affect consumption during the second half of FY27, potentially placing pressure on household spending and demand for goods and services.

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The brokerage also identified subdued rural sentiment and weaker kharif sowing as potential risks to consumption in the coming months. Prolonged geopolitical conflicts could add to these challenges, particularly if crude oil prices remain around USD 100 per barrel. Higher oil prices can increase transportation and production costs, potentially keeping inflation elevated. Global uncertainty is another concern, with rising yields in advanced economies and capital outflows from emerging markets contributing to tighter financial conditions. These developments could complicate the RBI’s efforts to control inflation while supporting economic growth.

India’s benchmark 10-year government bond yields have risen by around 70 basis points during calendar year 2026, according to the report. SBI Capital Markets expects yields to remain elevated until geopolitical tensions ease and inflationary pressures moderate. Higher bond yields can increase borrowing costs and influence investment decisions across financial markets. The report suggested that bonds could regain investor interest in FY28 if inflation begins to ease and expectations of a change in monetary policy strengthen. Until then, market participants are likely to monitor domestic inflation data, global bond movements and crude oil prices for indications of the economic outlook.

For banks, higher interest rates are expected to support margins in the near term, making FY27 a potentially favourable year for the sector. However, SBI Capital Markets expects non-food credit growth to gradually slow towards the end of the financial year as borrowing costs rise. The overall outlook will depend on inflation trends, domestic demand and developments in international markets. While the brokerage anticipates continued support for bank profitability in the near term, it expects bonds to become more attractive to investors in FY28 as inflationary pressures ease and the monetary policy cycle potentially turns towards lower interest rates.

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