RBI Rate Hike Looms as Central Bank Grapples With Excess Liquidity
The Reserve Bank of India (RBI) is facing growing expectations of a 25-basis-point repo rate hike to 5.50% at its October policy meeting, as it attempts to manage rising inflation pressures alongside substantial excess liquidity in the banking system. The repo rate currently stands at 5.25%, and a hike would be the first since February 2023. Nearly 60% of economists surveyed by Reuters, or 35 of 61, expect a 25-basis-point increase. Inflation has also moved above the RBI’s 4% target for three consecutive months, reaching 4.82% in August.
Liquidity management is adding another dimension to the RBI’s policy challenge. The banking system had an estimated ₹5.16 lakh crore surplus liquidity as of October 4, largely reflecting foreign-currency deposit inflows and government spending. On October 5, the RBI absorbed ₹2.10 lakh crore through two overnight Variable Rate Reverse Repo auctions, including ₹2,00,050 crore accepted in the first auction at a weighted average rate of 5.24%. The central bank has undertaken several such operations over the past two months to reduce surplus liquidity and bring overnight money-market rates closer to the policy repo rate.
The policy dilemma is therefore not limited to the repo rate. The RBI must balance inflation, liquidity, currency stability and economic growth while avoiding an unnecessarily sharp tightening of financial conditions. The Nifty 50 has already recorded an unusually weak run, falling for eight consecutive weeks, while the rupee remains under pressure. Market participants are watching whether the RBI opts for a shallow tightening cycle and how aggressively it continues liquidity absorption. The October 7 policy decision and accompanying guidance will be important signals for banks, borrowers, bond markets and the broader financial system.
Want to deepen your expertise beyond today’s news?
#Bankingnews
