The Reserve Bank of India could raise the repo rate by 25 basis points at its October policy meeting and push the benchmark rate to between 5.75 and 6 per cent in FY27, as persistent inflation risks and heavy bond supply keep government bond yields under upward pressure, Union Bank of India said in a report.
The findings, published ahead of the RBI's monetary policy committee meeting scheduled from October 5 to 7, add to a growing chorus of economists expecting the central bank to begin withdrawing the policy accommodation of the past two years.
Bond markets already feeling the heat
Indian government bonds remained under pressure through September as high crude oil prices and rising global yields strengthened expectations of RBI rate hikes, the lender noted. At the same time, higher domestic bond supply — including the RBI's own open market operation (OMO) sales and increased long-tenor issuance in the second-half borrowing calendar — kept yields elevated despite lower overall government borrowing.
"The pressure was particularly visible in the 5-year segment. Over September, the 5-year G-Sec yield rose 45bps, compared with 24bps for the 10-year, narrowing the 10-year minus 5-year spread from 36 to 16 bps," the report said.
The government plans gross dated G-Sec borrowing of Rs 7.86 lakh crore in H2FY27, with net borrowing broadly unchanged as aggressive switch auctions have reduced redemptions. Higher T-bill issuance and moderately higher state borrowing are expected to add to market supply.
Liquidity being squeezed
The central bank has been absorbing the FCNR(B)-led surplus through variable rate reverse repo (VRRR) auctions, OMO sales and foreign exchange swaps. OMO sales totalled Rs 1 lakh crore across three September auctions, helping reduce the banking system liquidity surplus to Rs 4.85 lakh crore as of September 30 from Rs 11.16 lakh crore on September 6.
A broad-based cash reserve ratio (CRR) hike, however, appears less likely, given the RBI's earlier exemption of eligible FCNR(B) deposits from reserve requirements.
What comes next
"We expect a 25bps rate hike, followed by one or two additional hikes during the remainder of FY27, taking the repo rate to 5.75–6.00 per cent, accompanied by hawkish guidance signalling continued vigilance on inflation," the report said. It warned that the 10-year G-Sec yield could face further upward pressure if policy tightening coincides with persistently elevated crude prices, rising global yields and subdued auction demand.
The October 5-7 meeting will be the first test of whether the RBI is ready to act pre-emptively — a move Bank of America and SBI Research have also argued is now warranted.
Sources: The Hindu BusinessLine: RBI repo rate likely to climb to 6% in FY27, G-Sec yields face upward pressure
The findings, published ahead of the RBI's monetary policy committee meeting scheduled from October 5 to 7, add to a growing chorus of economists expecting the central bank to begin withdrawing the policy accommodation of the past two years.
Bond markets already feeling the heat
Indian government bonds remained under pressure through September as high crude oil prices and rising global yields strengthened expectations of RBI rate hikes, the lender noted. At the same time, higher domestic bond supply — including the RBI's own open market operation (OMO) sales and increased long-tenor issuance in the second-half borrowing calendar — kept yields elevated despite lower overall government borrowing.
"The pressure was particularly visible in the 5-year segment. Over September, the 5-year G-Sec yield rose 45bps, compared with 24bps for the 10-year, narrowing the 10-year minus 5-year spread from 36 to 16 bps," the report said.
The government plans gross dated G-Sec borrowing of Rs 7.86 lakh crore in H2FY27, with net borrowing broadly unchanged as aggressive switch auctions have reduced redemptions. Higher T-bill issuance and moderately higher state borrowing are expected to add to market supply.
Liquidity being squeezed
The central bank has been absorbing the FCNR(B)-led surplus through variable rate reverse repo (VRRR) auctions, OMO sales and foreign exchange swaps. OMO sales totalled Rs 1 lakh crore across three September auctions, helping reduce the banking system liquidity surplus to Rs 4.85 lakh crore as of September 30 from Rs 11.16 lakh crore on September 6.
A broad-based cash reserve ratio (CRR) hike, however, appears less likely, given the RBI's earlier exemption of eligible FCNR(B) deposits from reserve requirements.
What comes next
"We expect a 25bps rate hike, followed by one or two additional hikes during the remainder of FY27, taking the repo rate to 5.75–6.00 per cent, accompanied by hawkish guidance signalling continued vigilance on inflation," the report said. It warned that the 10-year G-Sec yield could face further upward pressure if policy tightening coincides with persistently elevated crude prices, rising global yields and subdued auction demand.
The October 5-7 meeting will be the first test of whether the RBI is ready to act pre-emptively — a move Bank of America and SBI Research have also argued is now warranted.
Sources: The Hindu BusinessLine: RBI repo rate likely to climb to 6% in FY27, G-Sec yields face upward pressure
