SBI Research expects economic growth to remain resilient, potentially exceeding 7.5%, and believes a larger rate hike could be warranted at the December policy meeting.
The report, however, presents these measures as recommendations rather than confirmed RBI decisions.
Why SBI Research wants stronger action
The report points to heightened global uncertainty, volatile government bond yields, concerns over commodity supplies and shifting expectations about US interest rates. These developments have increased financial market volatility and intensified pressure on emerging market currencies.
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SBI Research argues that emerging markets could bear a disproportionate share of the adjustment as global capital flows become more volatile and the cost and availability of financing deteriorate.
It also warns that the impact of the RBI’s recent rate action on bond yields and the exchange rate has remained limited, with markets already having priced in the move. This, it argues, makes the timing and scale of the next policy response particularly important.
RBI may widen liquidity corridor
Alongside a rate increase, SBI Research has proposed widening the liquidity adjustment facility (LAF) corridor from 50 basis points to a higher level for a limited period, potentially without changing the repo rate, which the report puts at 5.5%.
The report notes that the RBI can adjust the marginal standing facility and reverse repo rates as part of its liquidity management responsibilities, independently of the MPC’s decision on the policy rate.
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It cites the central bank’s actions during the 2013 taper tantrum and the Covid-19 crisis in 2020 as precedents for widening the corridor during periods of financial stress.
What a larger hike could mean
A sharper rate increase could help reinforce monetary policy credibility and contain inflation expectations, but it could also raise borrowing costs for households and businesses. Higher lending rates may weigh on consumption, investment and credit demand, while tighter financial conditions could affect economic activity.
SBI Research has also called for stronger foreign exchange management and government measures to attract long-term capital into debt and equity markets.
Ultimately, the report argues that the RBI must balance growth with financial stability and respond decisively to persistent shocks. Whether the central bank adopts a larger hike or changes its liquidity framework will depend on its assessment of inflation, currency pressures and evolving economic conditions.
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