Federal Reserve Rate Hike Pressures Reserve Bank of India

The Federal Reserve System raised its benchmark interest rate by 25 basis points to a range of 3.75-4 per cent on September 17, marking its first increase since 2023. The decision follows strong employment data and persistent inflation, with the central bank signaling potential further hikes through 2026 to reach its 2 per cent inflation target.

This move, combined with Brent crude oil prices climbing above $100 per barrel due to conflict in West Asia, has shifted expectations for the Reserve Bank of India. Financial institutions including SBI Research, IDFC First Bank, Citi, and Deutsche Bank now predict a 25-basis-point repo rate hike during the October 7 policy review. While previous forecasts suggested rates would remain steady, analysts now project a shallow hiking cycle of 50 to 75 basis points through December.

Reserve Bank of India Governor Sanjay Malhotra indicated that rising retail inflation, which reached 4.82% in August, warrants a reassessment of the current 5.25% repo rate. To manage surplus liquidity, the central bank announced an open market sale of bonds worth ₹1 lakh crore. Economists warn that the narrowing interest-rate differential between India and the U.S., alongside imported inflation from high energy costs, may force the central bank to abandon its wait-and-watch approach in favor of a more hawkish tightening policy.