After the interest rate hike in the United States, attention is now on the Reserve Bank of India’s next step as well. The US Federal Reserve has raised rates by 25 basis points. On the other hand, India’s CPI inflation for August has risen to 4.82%, while crude oil prices have reached nearly $100 per barrel. In such a situation, balancing inflation, the rupee’s position and economic growth has become important for the RBI.
Let us understand what the situation is for the RBI after the US Fed’s decision and what impact a possible repo rate hike could have on home loans and fixed deposits.
What Impact Will the US Rate Hike Have on India?
The US Federal Reserve’s FOMC has raised the interest rate by 25 basis points. After this, the federal funds rate has reached the 3.75%-4% range. All 12 members of the FOMC supported this decision. The Federal Reserve described inflation as still elevated and emphasised a return towards the 2% inflation target. Its latest projections show a median federal funds rate of 4.1% at the end of 2026, although individual projections vary.
High interest rates in the United States can affect the flow of global capital. If investors’ money moves towards US assets, capital outflows from emerging markets and pressure on local currencies can increase. This situation is important for India because the RBI will also have to keep an eye on the rupee and foreign capital flows along with inflation.
Rising Inflation Has Increased the RBI’s Challenge
India’s CPI inflation for August rose to 4.82% from 4.45% in July. This was the third consecutive month that inflation remained above the RBI’s 4% target. The RBI’s inflation target is 4%, with a tolerance band of 2%-6%. According to the Indian Express, some economists estimate that CPI inflation in September could reach 5.7%.
The RBI has projected average CPI inflation at 4.7% for July-September, 5.9% for October-December, 5.5% for January-March 2027 and 5.3% for April-June 2027. This means inflation could remain above the 4% target in the coming quarters as well.
Along with this, crude oil prices reaching nearly $100 per barrel are also raising concerns. India imports more than 80% of its oil requirements. Therefore, a sharp rise in crude oil prices can increase pressure on the import bill and inflation.
What Will Be the Impact on Home Loans and Fixed Deposits?
If the RBI raises the repo rate to 5.75%, the interest cost of floating-rate home loans could increase. Its impact could appear in the form of higher EMIs for existing borrowers, a longer loan tenure, or both. However, the actual impact will depend on the benchmark to which the home loan is linked and how the bank implements the interest rate change.
On the other hand, an increase in the repo rate does not necessarily mean that fixed deposit interest rates will also rise in the same proportion. Banks decide deposit rates by looking at their funding needs, liquidity and competition in the market. Therefore, some banks may raise FD rates, but an equal increase across all banks is not necessary. In such a situation, the impact of higher interest rates on home loans could be visible relatively quickly, while the potential benefit for FD investors will depend on the bank’s own deposit rate policy.
What Does the Picture Ahead Say?
Looking at these circumstances, several economists and brokerage firms have indicated the possibility of a repo rate hike in the RBI’s upcoming meeting. A 25 basis point increase is estimated in the MPC meeting of 5-7 October. If this happens, the repo rate could reach 5.5%. This would be the RBI’s first rate hike in nearly three and a half years.
According to Moneycontrol, economists believe that two hikes of 25 basis points each could take place in October and December. This could take the repo rate to 5.75%. According to The Economic Times, SBI economists believe that CPI inflation could go above 6.5% and come below 6% at the beginning of 2027. HSBC and Deutsche Bank have also estimated 25 basis point hikes each in October and December.
According to Moneycontrol, IDFC First Bank’s chief economist Gaura Sengupta has indicated the possibility of a rate hike cycle beginning in October and total tightening of 50-75 basis points. Meanwhile, Deutsche Bank has estimated total hikes of up to 100 basis points in the current cycle, including a possible hike in 2027. However, these are experts’ estimates, and the RBI’s actual decision will depend on the upcoming economic data.
Disclaimer: This article is for educational and informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The companies mentioned are cited as examples within the context of market developments. Investors are advised to conduct their own due diligence and consult their financial advisor before making any investment decisions.
Investments in the securities market are subject to market risks. Read all related documents carefully before investing.
