The Reserve Bank of India (RBI) may start raising interest rates in October. It is important to note that this Monetary Policy Committee (MPC) meeting will be held against the backdrop of rising crude oil prices, US bond yields and headline inflation.
Morgan Stanley, which was earlier expecting the rate-hike cycle to begin in December, has shifted its view and now expects a 25 basis points (bps) repo rate hike at the October 7 policy meeting, followed by 25 bps hikes at three more consecutive meetings. This would take the cumulative increase to 100 bps.
Morgan Stanley expects the repo rate to reach 6.25% by April 2027. The brokerage, however, sees “the rate hike cycle primarily as policy normalisation rather than disruptive tightening, aimed at re anchoring real rates, containing second-round inflation risks, preserving inflation expectations, and supporting external stability.”
It expects the RBI to keep its policy stance unchanged at the October meeting.
Why Morgan Stanley expects RBI to hike rates
The biggest reason for shifting their expectations of rate hike sooner is the rising inflation, resilient economic growth and tighter global financial conditions.
Headline CPI inflation rose to 4.8% year-on-year(YoY) in August from 2.7% in January. Food inflation stood at 6%, while fuel inflation was 5.2% and core-core inflation was 2.9%.
Morgan Stanley expects inflation to remain elevated, with headline consumer price inflation (CPI) reaching around 5.7% in September.
It expects inflation to stay above 5% for four consecutive quarters and breach the RBI’s 6% upper tolerance threshold in the December quarter.
Morgan Stanley has raised its FY27 headline CPI forecast to 5.3% from 5% earlier. It expects inflation to remain above 5% through July 2027.
The brokerage expects food inflation to remain a key source of pressure. It sees food CPI inflation averaging 8.2% in the second half of FY27, compared with 5.4% in the first half.
10% rise in crude could push up CPI inflation
Oil remains a key risk for India. Brent crude is hovering above $100 per barrel currently. Morgan Stanley estimates that a 10% increase in crude oil prices could worsen India’s current account balance by 0.3 percentage points of GDP.
It could also raise CPI inflation by 0.68 percentage points and WPI inflation by 0.80 percentage points, while reducing GDP growth by around 0.15 percentage points.
Weak monsoon adds to food inflation risks
Uneven rainfall could add to food inflation pressures. Cumulative monsoon rainfall was 12% below normal, marking the widest deficit in 11 years.
Although sowing stood at 100.3% of normal levels, it was 1.2 percentage points below last year. Lower reservoir levels and weaker soil moisture could also affect crop output.
Morgan Stanley said the government has stepped up preparedness through data-driven planning, centre-state coordination, weekly crop monitoring, balanced fertiliser use and water budgeting.
Global commodity prices, US yields add to pressure
Global financial conditions have also tightened. Morgan Stanley said the Bloomberg commodity index has risen 17.6% since the start of the US-Iran conflict, while oil prices have increased 47%.
The brokerage expects Brent crude to average $100 per barrel in the December 2026 quarter before moderating to $75 per barrel by December 2027.
Higher US bond yields are another concern for emerging markets, including India. The US 10-year Treasury yield touched 5.24%, its highest level since June 2007.
Morgan Stanley expects the US Federal Reserve to raise rates twice, in December 2026 and March 2027, taking the terminal federal funds target range to 4.25-4.50% in the first quarter of 2027.
Growth remains resilient
Despite these inflation risks, Morgan Stanley expects the Indian economy to remain relatively resilient.
Vehicle registrations have recorded double-digit growth since October 2025. Passenger vehicle registrations have grown at an average rate of 25.3% year-on-year, while two-wheeler registrations have increased 24.7%.
Credit growth also remained strong at 18.1% year-on-year in September 2026. Real credit growth stood at 11.7% in August, while the two-year compound annual growth rate was 14.4%.
Industrial production rose 8% year-on-year in August, while FY27 year-to-date growth stood at 6.8%.
Morgan Stanley expects India’s GDP to grow 7.3% in FY27, with growth in the second half of the financial year estimated at around 7%.
Rate hikes seen as policy normalisation
Morgan Stanley does not view the expected rate-hike cycle as a major tightening that would necessarily lead to a significant slowdown in growth.
Instead, it sees the move as policy normalisation aimed at re-anchoring real interest rates, containing second-round inflation risks, preventing inflation expectations from becoming unanchored and maintaining external stability.
The brokerage expects the real policy rate to average 1.2% in calendar year 2027, compared with 0.7% in 2026.
Rupee, external stability remain key factors
The rupee has depreciated around 6.3% against the US dollar in calendar 2026. It weakened 1.1% in September after gaining 0.2% in August.
The India-US interest rate differential has also narrowed to 0.6 percentage points from 2.7 percentage points over the past 12 months.
Morgan Stanley’s foreign exchange team expects the rupee to reach 97 per dollar by December 2026 and 98.5 by December 2027.
The brokerage estimates that a 5% depreciation in the rupee could increase inflation by around 35 bps and reduce economic growth by about 25 bps.
What would RBI do?
The fourth MPC meeting of the RBI is set to begin on October 5. It will conclude on October 7 with RBI governor Sanjay Malhotra announcing the key policy rates.
Morgan Stanley expects the central bank to raise the repo rate by 25 bps this time and three more 25 bps consecutive increases. However, the brokerage said that the need for the RBI to deliver the full expected rate-hike cycle could be reduced if global financial conditions or oil prices see a reversal.