According to a Union bank of India report, the Reserve Bank of India (RBI) could increase the rates of its <a href="https://www.mid-day.com/business/business-news/article/what-is-repo-rate-heres-why-the-rbis-august-5-decision-is-crucial-23643011" target="_blank" rel="none noopener">key lending rate (repo rate)</a> to 5.75-6 per cent during the second half of FY27, reported news agency IANS.
An excess banking liquidity and rising inflation, amid a strong economic growth may prompt the apex bank to raise its key rate, the report said.
<h2>Rate hikes on the cards</h2>
It expects the central bank to increase the rates by 25 basis points each twice or thrice this year from December onwards.&nbsp;
The report expects RBI to effectively increase its repo rate to 5.75 per cent to 6 per cent in the second half of the year from its the current 5.25 per cent. <a href="https://www.mid-day.com/business/business-news/article/rbi-keeps-repo-rate-unchanged-at-5-25-per-cent-amid-global-uncertainties-after-concluding-monetary-policy-committee-mpc-23643273" target="_blank" rel="none noopener">In August, the RBI had kept the rates unchanged</a>.
However, a rate hike in October cannot be ruled out if the US Federal Reserve raises rates in September and the RBI first absorbs excess liquidity through durable measures, the report said.
"Rate hikes are back on the table for H2 FY27," it said.
<h2>Forex swap scheme infused liquidity</h2>
The anticipation of the rate hike comes amid foreign exchange inflows under the Reserve Bank of India's special swap facility. &nbsp;The RBI had launched the concessional FCNR swap window on June as part of broader steps to encourage capital inflows to boost India's balance of payments during global uncertainty.
The central bank has <a href="https://www.mid-day.com/business/business-news/article/indias-balanceofpayments-likely-to-post-surplus-of-usd-6575-billion-bank-of-baroda-report-23648359" target="_blank" rel="none noopener">mobilised inflows of around USD 136 billion</a> as of August 31 with USD 127.23 billion coming through FCNR(B) deposits. Overseas foreign-currency borrowings (OFCB) contributed USD 5.3 billion and external commercial borrowings (ECB) of added USD 3.9 billion.
The inflows, while strengthening the foreign exchange reserves, have sharply increased liquidity in the banking system. The core liquidity has risen to Rs 8.05 lakh crore by mid-August from Rs 4.82 lakh crore in mid-June, it noted. This could rise further to around Rs 14.17 lakh crore by September 11 making liquidity management a focal issue for the central bank.
"After getting dollar flows, now rupee liquidity management is key policy challenge for RBI," the report said.
<h2>Measures to absorb liquidity</h2>
Prior to the RBI's monetary policy meeting in October, it expects the apex bank to implement measures to absorb excess liquidity. The central bank is likely to use short and longer-term variable rate reverse repo operations (VRRR) and incremental cash reserve ratio (I-CRR) to absorb the excess liquidity in the system.
The central bank could also consider bond sales and foreign exchange swaps, the report said adding that the apex bank may look at temporary measures that can be reversed once credit demand strengthens.
(With inputs from IANS)

It expects the RBI to increase the rate to 6 per cent in the second half of the fiscal year

RBI could hike repo rate to 5.75-6 per cent in second half of FY27: Report

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The report expects RBI to effectively increase its repo rate to 5.75 per cent to 6 per cent in the second half of the year from its the current 5.25 per cent

RBI may hike repo rate to 5.75-6 per cent in second half of FY27: Report

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Home / Business / Business News / Article / RBI may hike repo rate to 5.75-6 per cent in second half of FY27: Report