Rising crude oil prices, fuel price hikes, and mounting inflationary pressures have triggered fresh concerns over the Reserve Bank of India’s (RBI) policy trajectory, with several fixed-income experts now seeing the possibility of a 50-75 basis point rate hike over the coming quarters if commodity prices remain elevated.
The macro environment, which was considered one of India’s key strengths just a few months ago, is now facing renewed pressure from global uncertainties, rising energy prices, and geopolitical tensions in West Asia.
While some market participants believe the Reserve Bank of India (RBI) may continue with a cautious pause in the near term, others argue that persistent inflationary risks could eventually force the central bank to tighten policy again.
Bond markets pricing in aggressive tightening
Market expectations have already started reflecting concerns around rising inflation and global commodity prices.
Gautam Kaul, Senior Fund Manager – Fixed Income at Bandhan AMC, said the Overnight Indexed Swap (OIS) market is currently pricing in more than 150 basis points of rate hikes over the next year.
However, Kaul cautioned that market pricing often tends to overshoot in both directions.
“If the current spike in commodity prices persists and leads to second-round effects, a more moderate rate hike of around 50–75 bps appears to be a reasonable expectation,” he said.
Elevated crude oil prices emerge as key risk
Several experts believe crude oil prices sustaining above the $100-per-barrel mark could significantly complicate India’s inflation and external account dynamics.
Puneet Pal, Head – Fixed Income at PGIM India Mutual Fund, said higher inflation now appears increasingly inevitable due to elevated crude oil prices and rising domestic fuel costs.
Pal highlighted that the government has already increased fuel prices marginally, while milk prices have also risen. In addition, wholesale price inflation (WPI) recently touched a 42-month high of 8.30%, signalling mounting producer-level inflationary pressures that could eventually feed into consumer inflation.
He also warned that India’s current account deficit could widen to nearly 2% of GDP if crude prices remain elevated, while continued foreign portfolio investor (FPI) outflows may keep balance-of-payments pressures intact.
“We see the policy repo rate rising by 50-75 bps by the end of CY2026,” Pal said.
RBI likely to remain cautious for now
Ankit Gupta, Co-founder and Director at BondsIndia.com, believes the RBI is still inclined to maintain a watchful pause rather than move immediately toward a rate hike.
Gupta pointed out that headline CPI inflation for April stood at 3.48%, comfortably within the RBI’s tolerance band, while core inflation remains relatively stable at around 3.7%, indicating that price pressures are not yet broad-based.
“After cutting rates by 125 bps through 2025, the RBI has already moved to a more data-dependent and neutral stance, with the repo rate currently at 5.25%,” he said.
According to Gupta, the central bank is likely to closely monitor crude oil prices, currency stability, imported inflation risks, and capital flows before taking any decisive action. He added that unless there is sustained pressure from higher crude prices, rupee weakness, and second-round inflationary effects, the probability of an immediate rate hike remains limited.
Global factors driving RBI concerns
According to fixed-income experts, the recent shift in market expectations is being driven more by global developments than by domestic economic weakness.
Devang Shah, Head of Fixed Income at Axis Mutual Fund, said domestic macro conditions continue to remain supportive, with inflation staying within the RBI’s tolerance band and growth holding up reasonably well.
However, Shah noted that the escalation and persistence of the West Asia conflict have added a new layer of uncertainty for policymakers.
“Crude oil prices have remained above US$100 per barrel, emerging as a key risk variable for India,” Shah said, adding that OIS markets have already begun pricing in the possibility of rate hikes later this year, largely driven by external rather than domestic factors.
Inflation outlook remains critical
Going forward, market participants believe the RBI’s policy trajectory will largely depend on the movement of crude oil prices, inflation trends, rupee stability, and global monetary conditions.
While experts remain divided on the timing and extent of any policy tightening, there is growing consensus that persistent commodity inflation and imported price pressures could limit the RBI’s ability to maintain an extended accommodative stance.
For now, the central bank appears focused on balancing growth support with inflation management, even as markets prepare for the possibility of a gradual tightening cycle if global risks continue to intensify.
( Disclaimer : Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
