The Reserve Bank of India (RBI) is likely to raise the repo rate twice by as much as 50 basis points by the end of December 2026 in line with global tightening cycle and excess liquidity in the banking system.

Market participants expect the Monetary Policy Committee (MPC) to deliver a 25 basis point rate hike in October 2026, followed by another 25 basis point increase in December, taking the benchmark repo rate to 6% by the end of the calendar year. One basis point is equal to one-hundredth of a percentage point.

The anticipated tightening comes amid concerns that inflation could exceed the RBI’s earlier projections, particularly if crude oil prices remain elevated.

“Incoming data suggests inflation is likely to overshoot those projections. If crude prices stay elevated in the $90-$110/barrel range, the pass-through from producer costs to final output prices is likely to accelerate,” Systematix Group said in a report.

“Against the prevailing 5.25% repo rate, it effectively implies a negative real policy rate — precisely the “cheap money” condition we had warned was unsustainable,” it added.

India’s retail inflation rose to 4.82% in August 2026 from 4.45% in July, while economists expect September inflation to approach the 5% mark.

A key factor influencing the RBI’s policy stance is the substantial liquidity surplus created by foreign currency inflows, particularly through the special non-resident deposit scheme. Analysts estimate that around $127 billion in FCNR(B) inflows have contributed significantly to the banking system’s liquidity surplus.

“FCNR(B) inflows have created a core liquidity surplus of ₹15 trillion. Excess liquidity can quickly become inflationary and can raise financial stability risks if banks become dependent on abundant liquidity,” HSBC said in a report.

The central bank has already deployed multiple liquidity management tools, including open market operations (OMOs) and variable rate reverse repo (VRRR) auctions, to absorb surplus funds from the banking system.

Analysts expect the RBI to intensify its absorption measures in the coming months. Through VRRR operations and other instruments, the central bank is expected to withdraw an additional ₹4 lakh crore of liquidity, over and above the nearly ₹2.5 lakh crore already absorbed.