RBI rate hike: BofA sees 100 bps more

New Delhi: The Reserve Bank of India’s decision to raise the repo rate by 25 basis points to 5.5% has triggered sharply different views among global and domestic brokerages on how far the central bank’s tightening cycle could go.

Bank of America has retained its call for as much as 100 basis points of additional rate hikes, suggesting a significantly longer tightening cycle. In contrast, Kotak Securities, Goldman Sachs, Citi and HSBC expect a more measured cycle, with most forecasts pointing towards another 50 basis points of tightening.

The RBI’s shift to a “calibrated tightening” stance has emerged as the key signal for markets. While the 25-basis-point hike was broadly anticipated, the change in stance indicates that the central bank is now more concerned about inflation risks and is prepared to tighten monetary policy further if required.

BofA expects a longer rate-hike cycle

Bank of America has taken the most hawkish view among the brokerages cited in the report.

BofA sees the RBI’s policy decision as a broader reset rather than a one-off rate increase. It believes the shift in stance came earlier than expected and indicates that the central bank could maintain a hawkish bias for an extended period.

The brokerage has therefore reiterated its call for 100 basis points of rate hikes. If delivered in full, that would take the repo rate substantially above its current 5.5% level.

BofA also noted that the RBI did not announce specific new measures for liquidity or foreign-exchange management alongside the policy decision. Instead, the central bank is expected to continue using its existing policy toolkit to manage liquidity and currency conditions.

Kotak Securities sees another 50 bps

Kotak Securities has a less aggressive forecast.

The brokerage expects the RBI to deliver another 50 basis points of tightening in its base case. Its projection includes a 25-basis-point hike in December followed by another 25-basis-point increase in February.

However, Kotak has highlighted upside risks to its forecast. A sharper increase in food or fuel prices could force the RBI to raise rates further than currently expected.

This makes inflation data and commodity prices particularly important for the trajectory of monetary policy over the coming months.

Goldman Sachs keeps terminal rate at 6.25%

Goldman Sachs expects the repo rate to eventually reach 6.25% during the current tightening cycle.

Its forecast includes another 25-basis-point increase at the December policy meeting, followed by 50 basis points of tightening during the first half of calendar year 2027.

Goldman Sachs is also watching whether inflationary pressure spreads more widely across the core inflation basket. The brokerage is particularly focused on inflation diffusion indicators, which can provide clues about whether price increases are becoming broad-based rather than being driven by a few categories.

Citi expects two more rate hikes

Citi has also moved towards a more hawkish rate outlook following the RBI’s change in stance.

The brokerage expects two additional 25-basis-point hikes in its base case and sees at least a 6% terminal repo rate for the current cycle.

However, Citi believes rates could move above 6% only if inflation risks become considerably stronger. It has identified elevated oil prices, stronger domestic demand and an El Niño-related shock as factors that could push the RBI towards more aggressive tightening.

On liquidity, Citi expects normalisation to occur mainly through organic factors instead of aggressive RBI intervention.

HSBC sees a milder tightening cycle

HSBC has adopted the most moderate view among the brokerages highlighted in the report.

It believes the RBI’s new stance is consistent with mild rate hikes rather than a deep tightening cycle. HSBC continues to forecast a 25-basis-point hike in December but does not expect the move to develop into an extended series of aggressive increases.

The brokerage also does not believe interest-rate hikes are being prioritised as the primary tool to support the rupee.

If currency pressures continue, HSBC expects the authorities could consider other ways to attract foreign inflows, including measures related to foreign direct investment and tax incentives.

Why has the RBI turned hawkish?

The RBI raised the repo rate from 5.25% to 5.5%, marking its first rate hike since February 2023. The Standing Deposit Facility rate now stands at 5.25%, while the Marginal Standing Facility rate and Bank Rate are at 5.75%.

Four of the six members of the Monetary Policy Committee backed the shift to a calibrated tightening stance.

RBI Governor Sanjay Malhotra has indicated that rate cuts are off the table in the near term as the central bank assesses external headwinds and inflation risks.

The RBI also raised its FY27 CPI inflation forecast to 5.2% from 5%. The inflation outlook has been complicated by deficient rainfall and the possibility of higher food prices. Headline CPI inflation rose to 4.82% in August, adding to concerns about the direction of price pressures.

RBI raises FY27 GDP growth forecast

The more hawkish inflation outlook has come alongside greater confidence in India’s economic growth.

The RBI raised its FY27 GDP growth forecast to 7.1% from 6.7%. The central bank also increased its Q2 growth projection to 7.2% from 6.4% and raised the Q3 estimate to 6.9% from 6.5%.

The Q4 FY27 forecast has been retained at 6.8%.

For the first quarter of FY28, however, the RBI lowered its growth projection slightly to 7.1% from 7.3%.

The combination of stronger growth expectations and higher inflation risks gives the RBI greater room to focus on price stability without necessarily having to worry about an immediate deterioration in economic activity.

What the different forecasts mean

The brokerage estimates show that the market is broadly preparing for further rate increases, but there is no consensus on how deep the cycle will become.

BofA’s 100-basis-point call represents the most aggressive outlook. Kotak Securities expects another 50 basis points, while Goldman Sachs sees the repo rate eventually reaching 6.25%. Citi expects at least a 6% terminal rate, while HSBC anticipates only a modest extension of the tightening cycle.

The difference largely depends on how inflation evolves. If food and fuel prices remain elevated or core inflation broadens, the RBI could be forced to tighten more aggressively. If price pressures remain contained, the central bank may be able to stop after a relatively small number of hikes.

For borrowers, further increases could mean higher borrowing costs for floating-rate loans, while savers could eventually benefit from higher deposit and fixed-income rates. Equity and bond markets, meanwhile, will closely track incoming inflation and growth data for clues about the eventual terminal rate.

RBI rate outlook remains uncertain

The RBI’s latest policy has given markets a clearer indication that the easing cycle has ended and that further rate hikes are now under consideration. However, the eventual destination remains uncertain.

The central bank faces a balancing act between controlling inflation and preserving the momentum of India’s economic growth. With FY27 GDP growth now projected at 7.1%, the immediate concern appears to be preventing inflationary pressures from becoming entrenched.

For now, BofA is betting on a much deeper 100-basis-point tightening cycle, while Goldman Sachs, Citi, Kotak Securities and HSBC expect a shallower path. The direction of food, fuel and core inflation over the next few months will ultimately determine which forecast comes closest to reality.