Summary of this article
August CPI inflation rose to 4.82 per cent from 4.45 per cent in July
Higher crude prices and a hawkish Fed could increase RBI rate-hike pressure
Experts expect rate hikes in October and December if inflation keeps rising
The Reserve Bank of India (RBI) could face pressure to raise interest rates as early as October. The US Federal Reserve has taken a hawkish line, and the interest rate gap between India and the US has narrowed further. Firm crude prices, a higher headline consumer price index (CPI) print for August and a pickup in core inflation could give the RBI the basis for a rate hike.
Conditions have changed quickly. Oil prices have rallied significantly in recent weeks, the US Fed raised rates by 25 basis points on 16 September and hinted at more, and the dollar has rallied, which bears on the rupee. At home, the FCNR(B) scheme has pulled in USD 127 billion, lifting spot forex reserves but leaving the system with more liquidity than it needs.
August retail inflation came in at 4.82 per cent, up from 4.45 per cent in July, with both food and core inflation showing signs of firming.
Food inflation, which carries a 34.80 per cent weight in the CPI index, rose to around 6 per cent year-on-year, according to category-level data. Every food category except cereals and vegetables is running above comfort levels, and the risk of those two catching up is high. Global prices of cereals, sugar and edible oils are rising fast. Sugar in India is up 10.8 per cent from a year ago after muted inflation in 2024 and 2025. Cereal prices have risen an average of 0.9 per cent a month over the last three months, against almost nothing through FY26.
The housing, electricity, gas and other fuels group also recorded a steady increase in inflation, rising to 2.61 per cent from 2.15 per cent in July. Electricity, gas and other fuels inflation stood at 3.10 per cent, with the category rising 0.31 per cent month-on-month in August.
Core inflation, excluding food and electricity and gas, increased to 4.31 per cent from 4.04 per cent in July. Core-core inflation, which also excludes petrol and diesel, stood at 4.02 per cent, up from around 3.5 per cent earlier in the year.
"August’s inflation print reinforces the narrative of slow but firming retail inflation. Vegetables continue to anchor the food basket, but the broader food category remains firm. Core inflation is edging up, driven by services demand and residual cost pass-through," said Namrata Mittal, chief economist, SBI Mutual Fund.
Mittal expects inflation to move higher in the coming months. "Next month’s CPI is tracking ~5.5 per cent. We are fairly convinced that headline CPI will cross the six per cent mark over the next few months. Our FY27 average stands at 5.4 per cent for now," she said.
"A rate hike in October policy is very much alive, and we would make a more certain case for a rate hike by December policy," Mittal added.
Radhavi Deshpande, chief investment officer, Kotak Mahindra Life Insurance, also sees a higher probability of an RBI rate increase, though she said a hike is not certain yet.
"The rise in CPI inflation to 4.82 per cent increases the likelihood of an RBI rate hike. Importantly, the inflationary trend is firming up, with core inflation edging higher, suggesting that underlying price pressures are becoming more broad-based," Deshpande said.
She also pointed to liquidity conditions and global rates as factors for the Monetary Policy Committee (MPC) to consider.
"At the same time, the RBI has already begun withdrawing liquidity through open market operations (OMO) sales, which is often a precursor to policy rate action," she said.
Deshpande, however, cautioned that the RBI is likely to wait for evidence that the rise in food and energy prices is feeding into broader inflation before committing to a tightening cycle.
HSBC expects the RBI to raise rates at both its October and December meetings.
"Hiking early may allow the RBI to hike less later. We continue to expect two rate hikes, one at each of the October and December policy meetings, taking the repo rate to 5.75 per cent," HSBC said in its latest report.
The global rate environment could add to the pressure on the RBI. Deepak Agrawal, CIO - debt and head of products at Kotak Mutual Fund, said the Fed's latest decision reflects its focus on bringing inflation back to its two per cent target.
"Given the elevated inflation, the Federal Open Market Committee (FOMC) hikes rates by 25 bps and guided for one more hike in CY 2026. This will help in bringing down inflation to the two per cent goal and restore the FOMC's credibility," Agrawal said.
He expects higher global rates, crude prices and domestic inflation to influence the Indian policy outlook.
"Given the FOMC's commitment to bring down inflation to two per cent, it shall support the long-term bond yields. Rising crude and inflation, along with increasing global rates, may also guide the India MPC to raise rates by 50 bps," Agrawal said.
