RBI repo rate likely at 6% by April 2027 as excess liquidity distorts markets
Synopsis
Bandhan AMC's latest fixed-income report puts a number on what markets are quietly pricing in: a repo rate at 6% by April 2027. With overnight rates already decoupled from policy rates due to excess liquidity, and inflation risks building from Middle East energy shocks to uneven monsoons, the RBI faces a dual normalisation challenge — rates and liquidity — that it cannot defer much longer.
Key Takeaways
Bandhan AMC projects the RBI repo rate rising to 6 per cent by April 2027 .
Excess rupee liquidity from foreign currency inflows has pushed overnight rates well below policy rates, creating market distortions.
Credit growth in India is running at approximately 18 per cent , adding to inflationary pressure.
Markets expect a mix of FX swaps , MSS bonds , OMO sales , and a possible CRR hike to address the liquidity overhang.
Rising Middle East tensions and uneven monsoons are driving broad-based commodity price pressures.
Recent MPC policy minutes signal growing hawkishness among committee members as global price pressures worsen.
The Reserve Bank of India (RBI) is likely to raise the repo rate to 6 per cent by April 2027 as it seeks a more stable policy footing amid excess rupee liquidity that is pushing overnight rates well below policy rates, according to a report released on Friday, 4 September by Bandhan AMC.
The Liquidity Problem
India's fixed-income investors are navigating a particularly complex environment, the report noted. On one side, rising inflationary pressures are making a case for faster policy normalisation. On the other, a surge of rupee liquidity — driven by foreign currency inflows — has severely distorted the overnight rate anchor, creating what Bandhan AMC describes as a structural misalignment between market rates and the Monetary Policy Committee (MPC) benchmark.
The firm said there is 'lesser luxury' with respect to the pace of liquidity normalisation given the 'severe distortions in play currently.'
What the Market Expects
According to the report, market participants anticipate a combination of temporary and permanent measures to address the liquidity overhang. These include foreign exchange (FX) swaps, Market Stabilisation Scheme (MSS) bonds, Open Market Operation (OMO) sales, and a possible hike in the Cash Reserve Ratio (CRR). The pace at which the RBI undertakes normalisation will determine how quickly the overnight rate anchor is re-fixed to policy rates.
Inflationary Pressures Building
The report flagged a broad-based escalation in commodity prices, including energy costs rising on the back of renewed Middle East tensions. Agricultural commodities are also under pressure, compounded by uneven monsoons across India. Domestically, GDP growth has remained strong and credit growth is running at around 18 per cent — conditions that, in combination, point toward rising inflation risk.
'Thus conditions, both global and local, point to rising inflationary pressures, even as the data up to now has been a source of comfort for RBI,' the Bandhan AMC report stated.
MPC Turning More Hawkish
The report observed that the perceived greater hawkishness evident in recent MPC policy minutes reflects growing vigilance among committee members. With global price pressures worsening, MPC members are reportedly becoming less comfortable with the current policy positioning. Bandhan AMC noted that this trajectory makes a repo rate hike to 6 per cent by April 2027 the most plausible outcome, though the reconciliation between liquidity management and rate normalisation will be the defining challenge for the central bank in the months ahead.
What to Watch
Investors in India's bond and money markets will closely track each MPC meeting for signals on the pace of normalisation. Any further deterioration in global commodity prices or a sustained weakening of the rupee could accelerate the timeline. The next MPC policy review and monsoon data will be critical near-term indicators.
Point of View
And the longer normalisation is deferred, the sharper the eventual adjustment. India's bond markets, already pricing in this trajectory, will be watching whether the RBI acts ahead of the curve or behind it.
NationPress
4 Sept 2026
Frequently Asked Questions
Why is the RBI likely to hike the repo rate to 6% by April 2027?
According to a Bandhan AMC report, the RBI needs to raise the repo rate to 6 per cent by April 2027 to establish a more stable policy footing. Rising inflationary pressures — from energy prices, uneven monsoons, and strong credit growth of around 18 per cent — combined with severe liquidity distortions make normalisation increasingly necessary.
What is the excess liquidity problem affecting Indian markets?
A surge in rupee liquidity driven by foreign currency inflows has pushed overnight rates well below the RBI's policy rate, creating a structural misalignment. This distortion undermines the effectiveness of the MPC's rate signals and is forcing the central bank to consider both rate and liquidity normalisation simultaneously.
What measures is the market expecting the RBI to take?
Market participants anticipate a combination of tools including FX swaps, Market Stabilisation Scheme (MSS) bonds, Open Market Operation (OMO) sales, and a possible Cash Reserve Ratio (CRR) hike to absorb the excess liquidity and re-anchor overnight rates to policy rates.
How are global factors contributing to India's inflation risk?
Renewed Middle East tensions have driven up energy prices, while a broad-based rise in commodity prices — including agricultural commodities — is adding to inflationary pressure. The Bandhan AMC report noted that both global and domestic conditions now point toward rising inflation risks.
What does the MPC's recent hawkishness signal?
The greater hawkishness evident in recent MPC policy minutes suggests that committee members are growing less comfortable with the current policy positioning as global price pressures worsen. The Bandhan AMC report interprets this as a clear signal that rate normalisation is moving up the MPC's agenda.
