RBI likely to hike repo rate 25 bps to 5.5% in October, September inflation may hit 5.5%
Synopsis
India's repo rate is heading to 5.5% as early as October, with inflation set to cross 6% by year-end — and ₹6 lakh crore in excess banking liquidity still to be mopped up. HSBC's latest call puts the RBI in a corner: tighten fast with blunt tools, or go gradual and risk inflation expectations drifting higher.
Key Takeaways
The RBI is expected to raise the repo rate by 25 basis points to 5.5 per cent in October 2026 , according to HSBC Global Investment Research .
India's retail inflation is projected to rise from 4.8 per cent in August to approximately 5.5 per cent in September 2026.
Inflation could average just over 6 per cent in Q4 2026 , breaching the RBI's upper tolerance band.
Approximately ₹6 lakh crore of excess liquidity needs to be withdrawn; ₹2 lakh crore may be absorbed by currency in circulation.
Oil prices above $100 a barrel and a firmer dollar have contributed to recent capital outflows from emerging markets.
Exports to the UK surged 12 per cent month-on-month in the first month after the UK-India FTA took effect, signalling trade-driven resilience.
The Reserve Bank of India (RBI) is widely expected to raise the repo rate by 25 basis points to 5.5 per cent in its October 2026 policy meeting, according to a research report by HSBC Global Investment Research. The report also flagged that approximately ₹6 lakh crore of excess liquidity needs to be withdrawn from the banking system over the coming months.
Inflation Trajectory Under Watch
The HSBC report projects that India's retail inflation will climb from 4.8 per cent in August 2026 to approximately 5.5 per cent in September 2026. It further estimates that inflation could average just over 6 per cent in the fourth quarter of 2026, breaching the RBI's upper tolerance band of 6 per cent.
Notably, the report flagged a sequential rise in core inflation, driven particularly by services inflation — historically the most rigid component. ‘We forecast inflation to average over 5 per cent for the next 12 months,’ the report noted.
How the Liquidity Withdrawal May Unfold
Of the estimated ₹6 lakh crore in excess systemic liquidity, the HSBC report estimates that currency in circulation could absorb roughly ₹2 lakh crore organically. The remaining surplus is expected to be managed through existing monetary instruments — including open market operation (OMO) sales, foreign-exchange spot sales, FX swaps, and variable rate reverse repos.
The report cautioned that liquidity reduction is likely to be gradual, unless the RBI opts for blunter tools such as a cash reserve ratio (CRR) hike — a move that would have a more immediate and forceful impact on banking-system liquidity.
Uncomfortable External Backdrop
The report highlighted a challenging global environment weighing on emerging markets, including India. Oil prices have been trending above $100 a barrel, and HSBC has revised its 2027 oil price forecast upward by $20 a barrel to $85 a barrel. Elevated energy costs, combined with higher global bond yields and a firmer US dollar, are typically unfavourable for capital inflows into emerging markets — and have already coincided with recent outflows from India.
Export Resilience Offers a Silver Lining
Despite the headwinds, the HSBC report underscored India's remarkable economic resilience, driven increasingly by a broadening export base. It cited a 12 per cent month-on-month seasonally adjusted surge in exports to the United Kingdom — recorded just one month after the landmark UK-India Free Trade Agreement (FTA) came into effect.
‘High-tech exports are on the rise, but mid-tech exports could rise too, especially once FTAs are made operational,’ the report noted. This signals that the trade pact's benefits may extend well beyond the initial uptick, with mid-technology sectors positioned as the next growth frontier.
With inflation likely to breach the RBI's comfort zone and global macro conditions tightening, all eyes now turn to the central bank's next monetary policy committee (MPC) meeting and whether the October hike will be the last in the current cycle or the beginning of a more extended tightening phase.
Point of View
But it risks being perceived as behind the curve if Q4 inflation genuinely averages above 6 per cent. The more telling detail is the ₹6 lakh crore liquidity overhang — how quickly and through what instruments the RBI drains it will define financial conditions far more than the headline rate move. A CRR hike, if deployed, would tighten credit supply sharply at a time when India's growth story is only just being amplified by FTA-driven exports.
NationPress
6 Oct 2026
Frequently Asked Questions
Why is the RBI expected to hike the repo rate in October 2026?
The RBI is expected to raise the repo rate by 25 basis points to 5.5 per cent in October 2026 because inflation is projected to climb from 4.8 per cent in August to around 5.5 per cent in September, with a risk of averaging above 6 per cent in Q4 2026. A sequential rise in core and services inflation has reinforced the case for further monetary tightening, according to the HSBC Global Investment Research report.
What is the current repo rate and what will it become after the hike?
The current repo rate is 5.25 per cent, and a 25 basis point hike in October would take it to 5.5 per cent. This is in line with the RBI's ongoing tightening cycle aimed at bringing inflation back within the 2–6 per cent tolerance band.
How will the RBI withdraw excess liquidity from the banking system?
The RBI is expected to mop up approximately ₹6 lakh crore in excess systemic liquidity over the coming months, with around ₹2 lakh crore likely to be absorbed naturally through currency in circulation. The remainder may be managed through open market operation sales, FX spot sales, FX swaps, and variable rate reverse repos, with a cash reserve ratio hike remaining a blunter option if needed.
How does the global environment affect India's monetary policy outlook?
Oil prices above $100 a barrel, elevated global bond yields, and a stronger US dollar are creating headwinds for emerging markets including India, contributing to recent capital outflows. These factors complicate the RBI's task, as higher imported inflation adds to domestic price pressures while tighter global financial conditions limit the room for accommodative policy.
What is the significance of India's export surge after the UK-India FTA?
Exports to the UK jumped 12 per cent month-on-month on a seasonally adjusted basis in the first month after the UK-India Free Trade Agreement came into effect — a sign that trade diversification is gaining momentum. The HSBC report suggests mid-technology exports could be the next beneficiary once additional FTAs become operational, providing a growth cushion against global financial tightening.
