RBI expected to hike repo rate twice to 6% by December 2026 as FCNR(B) inflows create ₹15 trillion liquidity surplus, with HSBC warning of inflation risks.
Alpha Score of 60 reflects moderate overall profile with strong momentum, poor value, weak quality, strong sentiment.
The Reserve Bank of India is expected to raise its benchmark repo rate twice over the next two quarters, lifting it to 6% by the end of December 2026, as it works to absorb a massive liquidity surplus and keep inflation in check.
The Monetary Policy Committee (MPC) is expected to deliver a 25 basis point hike in October 2026 and another 25 basis point increase in December, according to market participants. A basis point is one-hundredth of a percentage point. That would take the repo rate from its current 5.25% to 6%.
The anticipated tightening comes as inflation risks build, particularly if crude oil prices stay elevated.
"Incoming data suggests inflation is likely to overshoot those projections. If crude prices stay elevated in the $90-$110/barrel range, the pass-through from producer costs to final output prices is likely to accelerate," Systematix Group said in a report.
"Against the prevailing 5.25% repo rate, it effectively implies a negative real policy rate, precisely the 'cheap money' condition we had warned was unsustainable," it added.
India's retail inflation rose to 4.82% in August 2026 from 4.45% in July, and economists expect the September print to approach the 5% mark.
The central bank's policy stance is being shaped by a substantial liquidity surplus created by foreign currency inflows, particularly through the special non-resident deposit scheme. Analysts estimate that around $127 billion in FCNR(B) inflows have contributed significantly to the banking system's liquidity surplus.
"FCNR(B) inflows have created a core liquidity surplus of ₹15 trillion. Excess liquidity can quickly become inflationary and can raise financial stability risks if banks become dependent on abundant liquidity," HSBC said in a report.
The RBI has already deployed multiple tools to absorb surplus funds, including open market operations (OMOs) and variable rate reverse repo (VRRR) auctions.
Market participants expect the central bank to intensify these measures. Through VRRR operations and other instruments, the RBI is expected to withdraw an additional ₹4 lakh crore of liquidity, over and above the nearly ₹2.5 lakh crore already absorbed. The pace of these withdrawals, alongside crude price movements and inflation prints, will likely shape the timing of the anticipated rate actions.
In its stock market analysis, AlphaScala notes that the combination of a negative real policy rate and excess liquidity mirrors conditions that have historically preceded aggressive policy normalization in emerging markets.
Drafted by a large language model from the source reporting linked above, then screened by automated publishing checks. It is not read by a journalist before publication. Some articles cite our Alpha Score. Verify prices and figures against the original source. Educational coverage, not personalized advice.