Inflation in the country may hit 6-7 percent, significantly exceeding the RBI’s 2-6 percent tolerance band, potentially requiring further interest rate hikes, according to a report by Systematix Institutional Equities. The report also highlighted that the RBI’s inflation projections underestimate the growing risks from rising input costs, elevated household inflation expectations and broadening price pressures across the economy.
“With the stance now tightening, we see significant upside risk to inflation beyond the projected 6 percent peak,” the report stated. According to the study, the RBI’s household survey showed inflation expectations averaging 9.1 percent in September 2026, significantly higher than headline inflation and continuing to rise. It noted that the RBI’s inflation diffusion index also indicated that price pressures were spreading across a wider range of categories, suggesting that inflation was becoming increasingly broad-based.
The report questioned the RBI’s assessment of limited demand and supply-side pressures, pointing to inconsistencies between the central bank’s inflation outlook and its acknowledgement of resilient domestic consumption, strong investment and continuing supply disruptions. It highlighted that the RBI attributed rising fuel inflation largely to an unfavourable base effect while simultaneously acknowledging supply-side risks from the deficient southwest monsoon, El Niño conditions and volatile global crude oil prices.
The report also pointed to mounting cost pressures on Indian companies, particularly manufacturers, as evidence of persistent supply-side inflation. Input costs for non-financial companies surged around 40 percent year-on-year in the first quarter of FY27, alongside a 45 percent increase in crude oil prices. Gross margins contracted by 650-800 basis points as companies were able to pass on only part of the increase in costs to consumers. The study stated that government subsidies on food, energy and fertilisers, along with under-recoveries at oil marketing companies, had cushioned the inflationary impact of the West Asia conflict. “As this fiscal support wanes, pipeline inflation is likely to accelerate in the coming months and add to the existing momentum,” the report said.
On monetary policy, Systematix noted that the RBI’s 25-basis-point repo rate hike to 5.50 percent and its shift towards calibrated tightening marked the beginning of a new rate-hike cycle. However, it cautioned that the latest increase might not be sufficient to contain inflation, particularly as real interest rates remained negative when measured against elevated inflation expectations. “Inflation could surprise to the upside and reach 6-7 percent in the coming quarters. Restoring a real rate of at least 1 percent would require further hikes and a terminal repo rate of 6.5-7 percent, or 100-150 basis points above the current 5.5 percent,” the report stated.
(With Inputs From ANI)
Inflation May Hit 6-7%; RBI Could Hike Repo Rate By 100-150 Basis Points: Report
