The Reserve Bank of India delivered the expected 25 basis point repo rate hike to 5.5% on Wednesday, but the more consequential move was the shift in stance from neutral to “calibrated tightening.”
HSBC’s India economics team, led by Pranjul Bhandari, had argued ahead of the meeting that the October policy was “not about rate hikes.” The hike itself was virtually a given. The harder question was how the central bank would enhance credibility at a moment when global markets are becoming selective.
Oil prices were trading above $100 a barrel, with HSBC’s commodities team recently lifting its 2027 forecast by $20 to $85. Global bond yields had risen, the dollar was gently strengthening, and India had seen FII outflows in recent weeks. In such an environment, markets differentiate between credible and non-credible hikers. A hike perceived as dovish — especially with inflation rising and liquidity still loose — risked the wrong signal.
Growth has remained remarkably resilient, shifting from reliance on loose fiscal and monetary settings toward stronger goods exports. High-tech exports are rising; mid-tech could follow as free-trade agreements become operational. One month after the UK-India FTA took effect, exports to the UK rose 12% month-on-month on a seasonally adjusted basis. Inflation, meanwhile, is set to climb. HSBC expects it to move from 4.8% in August to around 5.5% in September and average just over 6% in the fourth quarter. Core inflation has begun rising sequentially, led by services — the component that had been most stubborn. The bank forecasts inflation above 5% for the next 12 months.
HSBC estimates roughly Rs 6 lakh crore needs to be drained from the banking system over the coming months. Currency in circulation could absorb about Rs 2 lakh crore; the rest will likely come gradually through existing tools — OMO sales, FX spot sales, FX swaps and VRRRs. A blunt CRR hike is not the base case.