Two weeks after the Reserve Bank of India ended a nearly four-year pause and raised interest rates, the country’s largest fund house is telling investors the story is far from over. SBI Funds Management, in its October 2026 Market Outlook released this weekend, says the RBI may need to push the benchmark repo rate all the way to 6.25 per cent to keep inflation in check.
That would mean another 75 basis points of rate hikes from the current 5.50 per cent, and it comes at a moment when every eyeball in the market is fixed on the central bank. The minutes of the October 7 policy meeting, at which the RBI hiked for the first time since February 2023, are due tomorrow, October 21, and investors will mine them for clues about how much more tightening lies ahead.
What SBI Mutual Fund Actually Said
In its October 2026 Market Outlook, the fund house argued that the battle against inflation is not won simply because the RBI moved in early October. Even after the 25-basis-point hike to 5.50 per cent earlier this month, policy is still running behind the curve, the report said.
“From a real rate perspective, policy rates may need to move to at least 6.25% to enable a real rate around 1%,” the report stated. In plain terms: with inflation running hot, the nominal rate needs to be meaningfully higher to leave a genuine cushion. The assessment implies roughly 75 basis points of additional tightening, though the report did not specify a timeline.
“Even with the current forward estimate on CPI inflation for FY27 at 5.20%, headline CPI remains almost 120 bps above the 4% target. This clearly warrants additional policy actions going forward,” the fund house added.
The Inflation Picture Driving the Call
The warning follows a nasty set of inflation prints. Retail inflation climbed to 5.54 per cent in September from 4.83 per cent in August, while wholesale inflation surged to 11.39 per cent from 9.92 per cent, according to government data released last week.
The RBI itself is projecting an uncomfortable path: inflation at 6 per cent in the third quarter of FY27 and 5.7 per cent in the fourth, with the full-year average at 5.2 per cent. SBI Funds Management cautioned that elevated crude oil prices, potential food inflation and strong domestic demand could push inflation above the RBI’s 6 per cent upper tolerance limit for two consecutive quarters.
The October 7 decision already reflected that anxiety. Governor Sanjay Malhotra said the inflation outlook was “not benign,” and the Monetary Policy Committee voted unanimously to raise the repo rate to 5.50 per cent while shifting its stance from neutral to “calibrated tightening,” a signal that rate cuts are off the table in the near term. HSBC and Goldman Sachs expect the RBI to raise rates again in December.
Why 6.25%? The Real-Rate Math
The logic behind the 6.25 per cent number is straightforward. The real interest rate, roughly the repo rate minus inflation, is the true measure of how restrictive policy is. With the RBI’s own FY27 inflation projection at 5.2 per cent, a 5.50 per cent repo rate leaves barely any cushion. A rate around 6.25 per cent would restore a real rate of roughly 1 per cent, the kind of margin central bankers consider genuinely disinflationary.
The fund house added a caveat, though: surplus banking-system liquidity could weaken the effectiveness of rate hikes, making liquidity management important for controlling inflation. In other words, the headline rate matters less if the overnight call rate is still trading below it because of excess cash sloshing around the system.
A Chorus of Hawks, With Different Destinations
SBI Mutual Fund is not alone in expecting more pain. Its sibling, SBI Research, said in its latest Ecowrap that inflation could peak at around 6.8 per cent in November 2026, and that the peak policy rate could reach 6 per cent.
SBI Research sketched two possible paths: a calibrated sequence that lifts the marginal standing facility rate to 6 per cent followed by a 25-basis-point repo hike in December, or a bolder 50-basis-point increase in December to signal resolve. “The choice between the two options would depend on the persistence of inflation and the trajectory of the rupee going forward,” the report said.
Meanwhile, the RBI has raised its FY27 GDP growth forecast to 7.1 per cent, up from 6.7 per cent, after the economy expanded 7.8 per cent in the June quarter. Strong growth, perversely, gives the central bank more room to keep rates high without panicking about a slowdown.
What It Means for Your Money
If the RBI does keep hiking, here is how it ripples through ordinary lives:
- Loans get costlier: Home, car and personal loan EMIs could rise if banks pass the increases through. Borrowers on floating rates will feel it first.
- Savers get a breather: Fixed deposit rates may inch up as banks compete for funds in a tighter liquidity environment.
- Bond markets stay on edge: The benchmark 10-year government bond yield has already risen for eight straight weeks to a three-year high of around 7.37 per cent. Another hike could push it toward 7.5 per cent before it stabilises.
- Equities stay selective: Rate-sensitive sectors like banks, real estate and automobiles typically wobble when borrowing costs rise, while cash-rich companies hold up better.
What to Watch Next
The calendar is packed. The MPC minutes arrive tomorrow, October 21, and investors will parse them for any divergence in views among committee members. Then comes the December 2-4 policy meeting, where HSBC and Goldman Sachs expect the next hike. Between now and then, each monthly inflation print will either validate the hawkish chorus or give the RBI an excuse to pause.
For now, the message from the Street is unambiguous: the October 7 hike was the opening move, not the final one. As SBI Mutual Fund put it, the near-term path for policy rates is “either a hike or hold,” with rate cuts firmly off the table.
FAQs
What is the repo rate?
It is the rate at which the RBI lends short-term money to commercial banks against government securities. Changes in the repo rate influence lending and deposit rates across the economy.
Why does SBI Mutual Fund expect the repo rate to hit 6.25%?
Its October 2026 Market Outlook argues that policy rates need to reach at least 6.25 per cent to deliver a real rate of around 1 per cent, given FY27 inflation is projected at 5.2 per cent. That implies roughly 75 basis points of further hikes from the current 5.50 per cent.
When is the next RBI policy meeting?
The next Monetary Policy Committee meeting is scheduled for December 2-4, 2026. The minutes of the October 7 meeting will be published on October 21.
Will my home loan EMI go up?
Possibly. If the RBI raises rates and banks pass the hike through, borrowers on floating-rate loans will see EMIs or tenures rise. Fixed-rate borrowers are unaffected until renewal.
Is inflation really that bad?
Retail inflation hit 5.54 per cent in September and wholesale inflation 11.39 per cent, both well above the RBI’s 4 per cent medium-term target. The central bank expects inflation to peak around 6 per cent in the December quarter.
That is all for now on the rate front. Stay tuned to Informeia for the MPC minutes breakdown tomorrow and the December policy build-up.
