RBI likely to hike repo rate to 5.75-6% in H2 FY27, says Union Bank report
Synopsis
Rate hikes are back on the agenda for India's central bank. A Union Bank of India report projects the RBI will lift the repo rate to 5.75-6% in H2 FY27 via two to three 25-bps moves, with December the likely launchpad — driven by a $136 billion forex inflow wave that has flooded the banking system with rupee liquidity and complicated the RBI's policy calculus.
Key Takeaways
The RBI is projected to raise the repo rate to 5.75-6% in H2 FY27 , according to a Union Bank of India report.
The report anticipates 2-3 rate hikes of 25 basis points each from the current rate of 5.25% , with December as the likely start.
Foreign exchange inflows under the RBI's special swap facility reached approximately $136 billion as of 31 August , of which $127.23 billion came via FCNR(B) deposits .
Core banking liquidity rose to ₹8.05 lakh crore by mid-August from ₹4.82 lakh crore in mid-June, and could hit ₹14.17 lakh crore by 11 September .
The RBI is expected to deploy VRRR operations and I-CRR ahead of its October policy meeting to absorb excess liquidity.
An October rate hike remains possible if the US Federal Reserve raises rates in September.
The Reserve Bank of India (RBI) is expected to raise its benchmark repo rate to 5.75-6 per cent in the second half of FY27, as the central bank confronts a surge in banking system liquidity and rising inflationary pressures against a backdrop of robust economic growth, according to a report by Union Bank of India (UBI).
Rate Hike Cycle on the Horizon
The UBI report anticipates two to three rate increases of 25 basis points each, starting from the current rate of 5.25 per cent. Under its base-case scenario, the rate hike cycle is likely to begin in December. 'Rate hikes are back on the table for H2 FY27,' the report stated, identifying December as the more probable starting point for monetary tightening.
Forex Inflows Flood Banking System With Liquidity
The outlook is shaped significantly by a surge in foreign exchange inflows under the RBI's special swap facility, which had reached approximately $136 billion as of 31 August. Of this, $127.23 billion came through FCNR(B) deposits, with the remainder flowing in via overseas foreign currency borrowings and external commercial borrowings.
These inflows have dramatically expanded rupee liquidity in the banking system. Core liquidity climbed to ₹8.05 lakh crore by mid-August, up from ₹4.82 lakh crore in mid-June. In an illustrative scenario outlined by the report, core liquidity could surge further to around ₹14.17 lakh crore by 11 September, making liquidity management a critical policy challenge for the central bank. 'After getting dollar flows, now rupee liquidity management is the key policy challenge for RBI,' the report noted.
Tools RBI May Deploy Before October Policy Meet
UBI expects the RBI to announce liquidity absorption measures ahead of its October policy meeting. Among the instruments seen as having a high probability of deployment are short- and longer-term variable rate reverse repo (VRRR) operations and an incremental cash reserve ratio (I-CRR). Bond sales and foreign exchange swaps are also on the table, according to the report.
The PSU bank expects the RBI to initially lean on temporary, reversible measures as credit demand is anticipated to strengthen in H2 FY27. It estimates a 50:50 mix of short-term VRRR and longer-duration instruments could be deployed to absorb the projected surplus liquidity.
October Rate Hike Cannot Be Ruled Out
The report flagged an alternative scenario: a rate hike as early as October cannot be ruled out if the US Federal Reserve raises rates in September and the RBI moves swiftly to absorb excess liquidity through durable measures first. This contingency underscores the degree to which domestic monetary policy remains sensitive to global central bank signals, particularly from the Fed.
With liquidity management emerging as the dominant near-term challenge, the RBI's October meeting is shaping up to be a pivotal inflection point for Indian monetary policy in FY27.
Point of View
The RBI may be pivoting toward tightening — not because of domestic demand weakness, but because of an unprecedented liquidity glut triggered by its own dollar-swap success. The irony is sharp: the RBI's strategy to attract foreign capital has created a rupee liquidity problem that may now force rate hikes. If the October meeting becomes live — contingent on the Fed — markets will have very little runway to reprice. The bigger structural question is whether temporary VRRR and I-CRR tools are sufficient, or whether the RBI will need to deploy durable absorption measures that could tighten credit conditions faster than the headline rate signals.
NationPress
4 Sept 2026
Frequently Asked Questions
Why might the RBI raise the repo rate in H2 FY27?
According to a Union Bank of India report, the RBI may raise the repo rate to contain excess banking system liquidity — swelled by $136 billion in forex inflows — and to manage rising inflation amid strong economic growth. The rate hike cycle is projected to begin in December under the base-case scenario.
By how much could the RBI raise rates, and from what level?
The report projects two to three hikes of 25 basis points each, taking the repo rate from its current 5.25% to a range of 5.75-6% by the end of H2 FY27.
What has caused the surge in banking system liquidity?
Foreign exchange inflows under the RBI's special swap facility reached approximately $136 billion as of 31 August, with $127.23 billion coming through FCNR(B) deposits. These inflows have pushed core liquidity from ₹4.82 lakh crore in mid-June to ₹8.05 lakh crore by mid-August.
What measures could the RBI use to absorb excess liquidity before a rate hike?
The Union Bank of India report expects the RBI to use short- and longer-term variable rate reverse repo (VRRR) operations and an incremental cash reserve ratio (I-CRR) before its October policy meeting. Bond sales and foreign exchange swaps are also cited as possible tools.
Could the RBI hike rates as early as October?
Yes, the report says an October rate hike cannot be ruled out if the US Federal Reserve raises rates in September and the RBI first absorbs excess liquidity through durable measures. December, however, remains the more likely starting point under the base-case scenario.
