Pratidin
Economy19 September 2026The Hindu, Page 13

RBI may raise rates twice by the end of 2026, analysts say

Inflation is back in the conversation. Why a rate hike now?

Published 19 September 2026. Written by Pratidin from the reports linked at the end; every fact checked by a separate review before publishing. How we work

Analysts expect the Reserve Bank of India to raise its policy repo rate twice before the end of calendar 2026 as inflation pressures build. Nomura's head of global macro research, Rob Subbaraman, expects hikes at both the October and December meetings of the Monetary Policy Committee, with retail inflation likely to breach 6%, the upper end of the RBI's tolerance band, in the coming months.

The pressures come from several directions: a strong El Niño that has hurt the monsoon and crops, higher oil prices amid disruption around the Strait of Hormuz, and a rate increase by the U.S. Federal Reserve, which raises the risk of capital outflows from emerging markets. Nomura expects the Fed to raise rates again, probably in December.

Growth remains relatively strong, with Nomura forecasting 7% GDP growth in 2026-27, which gives the RBI room to tighten. Strong inflows into foreign currency non-resident (FCNR(B)) bank deposits, reported at $133 billion, support the external position.

Practise this in the app: flashcards, quiz and a timed answer
Prelims

Prelims facts

  • The Monetary Policy Committee has six members, three from the RBI and three appointed by the government; the Governor has a casting vote.
  • The inflation target is 4% CPI with a tolerance band of 2-6%, under the RBI Act as amended in 2016.
  • The real interest rate is the nominal rate minus inflation; hikes aim to keep real rates positive.

Quick recall

How many members does the Monetary Policy Committee have?
Six: three from the RBI (including the Governor) and three appointed by the government.
What is India's inflation target?
4% CPI inflation, with a tolerance band of 2% to 6%.
Under which law is the inflation target set?
The RBI Act, 1934, as amended in 2016.
Who has the casting vote in the MPC?
The RBI Governor, in case of a tie.
When does Nomura expect the RBI to raise rates?
At the October and December 2026 MPC meetings.
What growth does Nomura forecast for 2026-27?
7%.
What is a real interest rate?
The nominal interest rate minus inflation.
Why does a US Fed rate hike matter for India?
It can cause capital outflows from emerging markets and weaken the rupee.

Prelims practice question

Consider the following about the Monetary Policy Committee:
1. It has six members.
2. All its members are RBI officials.
Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2
Show answer

Answer: (a) 1 only. The MPC has six members: three from the RBI including the Governor, and three external members appointed by the government.

Use this in UPSC Mains: previous-year questions

Recurring theme: Monetary policy, inflation targeting and the RBI's policy tools

  1. 2024 · GS3 · 10 marksAnswers it directlyUse it in the body

    What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.

    How to use this

    Explains the supply-side drivers of food inflation and why repo rate changes alone have limited effect on them.

    • A strong El Niño has hurt the monsoon and crops, raising food prices, which make up a large share of India's CPI; Nomura expects retail inflation to breach 6%.
    • Note that interest rates cannot grow more food or pump more oil; they work mainly on demand.
    • It recommends supply-side steps such as buffer stocks and import duty cuts, as with edible oils, alongside targeted fiscal support.
  2. 2019 · GS3 · 10 marksCovers one partUse it in the body

    Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments.

    How to use this

    Lets you show that strong growth can coexist with rising inflation and external risks, complicating the 'good shape' claim.

    • Nomura forecasts 7% GDP growth in 2026-27 yet expects CPI inflation to breach the 6% upper tolerance limit, prompting expected rate hikes in October and December.
    • A US Federal Reserve rate increase raises the risk of capital outflows, while FCNR(B) deposit inflows of $133 billion support the external position.
    • Under the RBI Act as amended in 2016, the six-member MPC targets 4% CPI inflation within a 2 to 6% band.
Prelims
  1. 2022 · Prelims

    With reference to the Indian economy, consider the following statements: 1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities. 2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market. 3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars. Which of the statements given above are correct? (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

    Tests how the RBI's tools respond to inflation and currency pressure, the context for rate hikes.

  2. 2017 · Prelims

    Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? 1. It decides the RBI's benchmark interest rates. 2. It is a 12-member body including the Governor of RBI and is reconstituted every year. 3. It functions under the Chairmanship of the Union Finance Minister. (a) 1 only (b) 1 and 2 only (c) 3 only (d) 2 and 3 only

    Rate decisions are taken by the MPC, whose composition and role UPSC has tested directly.

Mains practice question

Explain how supply-side shocks such as El Niño and oil prices complicate monetary policy under flexible inflation targeting. (150 words)

Model answer

India's flexible inflation targeting asks the MPC to keep CPI inflation at 4% within a 2-6% band, while keeping growth in mind.

Why supply shocks complicate it

  • El Niño hurts crops and raises food prices, which make up a large share of India's CPI.
  • Oil prices raise transport and input costs.
  • Interest rates cannot grow more food or pump more oil; they work mainly on demand.

The dilemma

  • Look through temporary shocks to protect growth, or
  • Act if shocks raise inflation expectations and wages, which is why analysts expect hikes.
  • A US rate hike adds pressure through capital outflows and a weaker rupee.

Better policy mix

  • Supply-side measures: buffer stocks, import duty cuts, as with edible oils.
  • Fiscal support targeted at the vulnerable.

Monetary policy works best against demand-led inflation; supply shocks need a joint response with fiscal and supply measures.

The basics

Why this matters

Analysts expect the RBI to raise interest rates twice by the end of 2026 as inflation threatens to cross 6%. Rate hikes affect loan costs for households and businesses, growth, and the rupee.

2 hikes
Expected by Nomura at the October and December 2026 policy meetings
With retail inflation likely to breach 6% in the coming months.

How India's target works

Under flexible inflation targeting, the RBI aims for 4% CPI inflation within a band of 2% to 6%.

Monetary policy framework
  1. 1Target4% CPI inflation
  2. 2Band2% to 6%
  3. 3Decision-makersSix-member Monetary Policy Committee
  4. 4ToolThe repo rate

How a rate hike works

Raising the Repo rate slows demand step by step.

Transmission
  1. 1Repo rate risesThe RBI's lending rate to banks.
  2. 2Bank costs riseBanks pay more for funds.
  3. 3Loan rates riseBorrowing becomes costlier.
  4. 4Demand slowsSpending and investment ease.
  5. 5Inflation easesWith a lag of several quarters.

Where the pressure comes from

Much of the pressure is Supply-side inflation.

Inflation drivers in 2026
  1. 1El NiñoWeak monsoon, food prices
  2. 2OilDisruption near the Strait of Hormuz
  3. 3US FedRate hike pulls capital
  4. 4RupeeWeaker currency raises import costs

The dilemma

Rate hikes cannot grow food, but they can stop price rises from spreading into wages and expectations. The Monetary Policy Committee must also watch Capital flows as US rates rise.

You now know

  • India targets 4% CPI inflation within a 2-6% band.
  • The six-member MPC sets the repo rate; the Governor has a casting vote.
  • Nomura expects hikes in October and December 2026.
  • Drivers include El Niño, oil prices and a US rate hike.

Go deeper

In one line: Inflation risks from El Niño, oil and a US rate hike have led analysts to expect the RBI to raise rates twice by the end of 2026.

Why it matters for UPSC

GS3 asks about monetary policy and inflation. The MPC structure and inflation target are standard Prelims facts.

The core idea

Under flexible inflation targeting, the RBI aims for 4% inflation within a 2-6% band. If inflation looks set to break above 6%, the Monetary Policy Committee raises the repo rate to cool demand. The difficulty is that much of today's pressure is from supply: a weak monsoon and costly oil. Rate hikes cannot grow food, but they can stop price rises from spreading into wages and expectations. A US rate hike adds pressure by pulling money out of emerging markets. Strong growth gives the RBI room to act.

Numbers and dates to remember

  • 4% target, 2-6% band.
  • Six MPC members; Governor's casting vote.
  • Hikes expected in October and December 2026.

Where to go next

In one line: The RBI must decide whether supply-driven inflation risks becoming entrenched enough to justify slowing a strong economy.

Why supply shocks are tricky

Food and fuel price rises reduce real incomes, which already slows demand. Hiking rates on top can hurt growth. But if expectations rise, inflation can spread.

Strong growth gives room

Nomura forecasts 7% growth in 2026-27.

External factors

A US rate hike widens interest differentials, prompting Capital flows out of India and pressure on the rupee.

Tools beyond the repo rate

Liquidity operations, the cash reserve ratio and forex intervention.

Links

Monetary Policy Committee, Repo rate and Supply-side inflation.

Where to go next

Monetary Policy Committee

Who sets the rate

In one line: The Monetary Policy Committee sets India's policy repo rate.

Composition

Six members: the RBI Governor (chair), a Deputy Governor, an RBI officer, and three external members appointed by the government for four years.

Voting

Majority vote; the Governor has a casting vote in a tie.

Legal basis

Created by the 2016 amendment to the RBI Act, 1934.

Where to go next

Monetary Policy Committee: every story that connects to it (4)

Repo rate

The main policy lever

In one line: The repo rate is the rate at which the RBI lends short-term funds to banks against government securities.

Why it matters

It anchors short-term interest rates across the economy.

Related rates

The Standing Deposit Facility rate is the floor and the Marginal Standing Facility rate the ceiling of the policy corridor.

Effect

Higher repo rates raise loan rates and cool demand.

Where to go next

Supply-side inflation

Why food prices are hard to fight

In one line: Supply-side inflation happens when prices rise because goods become scarce or costly to produce.

Causes

Poor monsoons, crop damage, higher oil prices and supply chain disruptions.

Why policy struggles

Interest rates work mainly through demand, so they cannot directly fix supply shortages.

Better tools

Buffer stocks, import duty cuts, better storage and supply chain improvements.

Where to go next

Capital flows

How US rates affect India

In one line: Capital flows are movements of money into and out of a country for investment.

Types

Foreign direct investment, foreign portfolio investment in shares and bonds, and loans.

US rates and India

When US rates rise, investors may move money to the US, weakening the rupee.

Buffers

Foreign exchange reserves and stable FDI help cushion outflows.

Where to go next

Take the 19 September 2026 quiz: 30 Prelims-style questions with answers

Syllabus

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