RBI's rate panel opens a three-day meeting with the repo rate at 5.25 percent

The Reserve Bank of India's Monetary Policy Committee opened a three-day meeting on Monday with the policy repo rate at 5.25 percent, and with bank economists split on whether Wednesday's decision will be a hold or the first increase since February 2023.

Governor Sanjay Malhotra's committee has left the rate unchanged at four meetings in a row. Those holds followed 125 basis points of cuts in 2025. The decision is due on Wednesday, 7 October. Between now and then the six members have the inflation print, the oil price and a Federal Reserve move that landed after the August policy to weigh.

Bank of Baroda, in a note published as the meeting began, said it expected both the repo rate and the stance to stay unchanged, with a cautious tone. It put the expected rate at 5.25 percent and the stance at neutral. The same note said a hike cycle was more likely to start in December, and that the cumulative rise in that cycle could be 50 to 75 basis points. Its case for waiting is that credit growth and deposit growth have both been strong, and that an October rise could slow that momentum.

Union Bank of India took the other side. It expects a 25 basis point increase this week, then one or two further rises in the rest of the financial year, taking the repo rate to between 5.75 and 6 percent, with guidance that stays watchful on inflation. A 25 basis point move on Wednesday would put the rate at 5.50 percent. It would also be the first increase since February 2023.

The numbers both notes are using sit in a narrow band, and they all moved the wrong way for a central bank that has been cutting. Bank of Baroda said that since the August policy, crude prices had risen 28 percent amid the US-Iran confrontation, the Federal Reserve had raised rates by 25 basis points, Indian bond yields had hardened by 44 basis points, and domestic CPI inflation had risen to 4.8 percent. BusinessLine reported Brent crude near $101.26 a barrel and a US crude price near $89.98 as the meeting opened.

EY, in its preview, listed four factors it expected the committee to weigh: the Fed's 25 basis point rise, a growth outlook it called comfortable, inflation pressure visible in both wholesale and consumer prices, and broad money supply growing above trend. None of those is a vote. They are the file in front of the committee.

The market has already priced a tense version of this meeting. The Sensex closed on Monday at 72,382.47, up 472.77 points, after an eight-week losing run that traders had tied to oil above $100 and a rupee past 96. A hold on Wednesday would tell bond desks that Malhotra is willing to look through a 4.8 percent CPI print for one more meeting. A 25 basis point rise would tell them the cutting cycle of 2025 is over.

The last time the RBI raised rates, in the cycle that ended in February 2023, the move was a response to a post-pandemic inflation spike and a global tightening led by the Fed. The resemblance this week is the oil price and the Fed, not the growth picture. Bank of Baroda's reason for a hold is that loan growth does not look like an economy that needs a brake. Union Bank's reason for a rise is that 4.8 percent inflation, after a year of cuts, does not look like a price path the committee can ignore for another quarter.

Wednesday's statement will also have to say something about liquidity and the stance. A hold with a shift from neutral to withdrawal of accommodation would be a third outcome, between the two notes. The committee has used that combination before when it wanted to signal without moving the rate. Bond yields that have already risen 44 basis points since August will react to the stance line as much as to the rate.

What the meeting cannot settle is the oil price. A coordinated G7 stock release is already in the market. If Brent stays near $101, the December meeting that Bank of Baroda has marked for the start of a hike cycle arrives with the same file, only thicker. If the release pulls diesel and crude down before Wednesday, Union Bank's 25 basis point call gets harder to defend inside the room.