Repo rate to be hiked by 25 bps each in October and December 2026; VRRRs to remain primary liquidity absorption tool
Thematic Report
01 Oct 2026
Policy rate hike to be upfronted to October 2026 policy: In the base case, ICRA expects the CPI inflation to average at
5.0% in FY2027, assuming an average crude oil price of $85-90/bbl in the fiscal and no further change in fuel Retail Selling
Prices (RSPs). However, if the recent surge in crude oil prices (to above $100/barrel) sustains, it could lead to a hike in fuel
prices, and further generalisation of price pressures, which would necessitate an upward revision in the CPI inflation
forecasts. In the adverse case, the CPI inflation is projected to average at 5.3-5.5% in FY2027, with the Q3 and Q4 FY2027
prints exceeding the baseline estimates by ~30-50 bps. With crude remaining above $100/barrel, ICRA now expects policy
tightening to commence in October 2026 as against our earlier call of the first hike in December 2026. We anticipate rate
hikes of 25 bps each in the October and December policies to quicken the transmission in the economy.
Yield curve to shift further upwards: India’s yield curve has shifted upwards and steepened at mid-September 2026, as
inflation risks have fueled rate hike expectations, oil prices have surged, and global bond yields have risen. The policy rate
hikes are set to push up the yield curve further, although the extent of the uptick is likely to be larger at the shorter end of
the curve. ICRA expects the 10Y G-sec to trade in the 7.0-7.25% range in the near term, amid persistent fiscal and
inflationary concerns from the West Asia conflict, and the expected kickoff of the rate hike cycle.
