The Reserve Bank of India may raise its repo rate twice by the end of 2026, taking it to 5.75%, as food and energy prices push inflation higher. The forecast, reported by Economic Times citing PTI and Japanese brokerage Nomura, points to a difficult policy balance: the RBI may need to respond to an immediate inflation shock while avoiding a prolonged tightening cycle that weakens consumption, housing affordability and urban demand.
Nomura expects the repo rate to rise by 25 basis points in October and another 25 basis points in December. It also expects the hiking cycle to lose momentum from February 2027 as higher prices begin to weigh on demand and the inflation outlook softens. The brokerage has described a possible “one-and-done” increase as an alternative, but its base case is for two hikes.
The distinction matters because the central issue is not simply whether rates rise. It is whether inflation remains broad and persistent enough to require continued monetary tightening, or whether the same price pressures that initially prompt higher rates eventually weaken household spending and limit the RBI’s room to act.
For cities, the rate question is closely connected to the cost and availability of credit. The supplied report does not provide direct data on home-loan demand, housing sales, construction starts or real-estate prices. It therefore cannot establish that a higher repo rate will produce a specific housing-market outcome. But a rise in the policy rate would place the cost of borrowing at the centre of decisions made by households, developers, contractors and businesses operating in urban economies.
The immediate inflation picture is already putting pressure on the RBI. Consumer inflation rose to 4.82% in August, above the central bank’s 4% medium-term target for a third consecutive month. Nomura expects inflation to rise from 4.8% in August to 6.3% in the fourth quarter before easing to about 5.3% in the first half of 2027 and falling below 4% in the second half. Its forecast is for average consumer inflation of 5.2% in financial year 2026-27 and 4% in 2027-28.
These projections indicate that the policy dilemma is being shaped by timing. Inflation is expected to worsen before it improves. If the RBI waits for the later easing to become visible, price expectations and currency pressures could become harder to manage. If it tightens aggressively during the inflation spike, the resulting pressure on demand could deepen just as food prices are reducing household purchasing power.
Food inflation is the most immediate risk identified in the report. Nomura cited deficient monsoons and weaker kharif sowing as factors that could hurt both kharif and rabi crop output. Government measures involving sugar and onions may limit some price increases, but lower crop output continues to pose upside risks to food inflation.
The urban consequence of this pressure is not limited to the price of food in city markets. Higher food bills reduce the amount of household income available for discretionary spending and large financial commitments. That could affect the ability of some households to absorb higher borrowing costs, although the supplied report does not quantify the effect on home purchases or housing loans.
The growth data gives the RBI some room to focus on inflation. India’s real GDP growth rose 7.8% year-on-year in the second quarter, while bank credit growth stood at 19.1% in August, according to Nomura. Those figures suggest that economic activity and lending have remained resilient despite the prospect of tighter monetary policy.
But the same report identifies signs that this resilience may not continue indefinitely. Higher food prices could squeeze real disposable incomes and reduce demand for discretionary goods. Deficient rainfall could weaken agricultural output and rural consumption. Nomura also pointed to a possible drag from developments in artificial intelligence on India’s software-services sector, with the software-services surplus falling to $51.4 billion in the second quarter of 2026 from a peak of $53 billion in the fourth quarter of 2025.
This creates a policy problem that is particularly relevant to urban economies. Cities depend on a combination of household consumption, business investment, credit expansion and employment in service sectors. A rate increase may help contain inflationary expectations, but it can also make financing more expensive at a time when households are facing higher essential costs and some urban industries are confronting external risks.
The monetary policy transmission to housing is not directly measured in the supplied material, but the institutional mechanism is clear. The repo rate is the RBI’s policy rate and influences the broader cost of funds in the financial system. If commercial borrowing costs rise, lenders may reprice loans or tighten lending conditions. For a prospective homebuyer, the relevant question would be whether income growth and household cash flows can absorb a higher monthly repayment. For a developer or construction company, the question would be whether project finance, working capital and sales demand remain viable at a higher cost of capital.
The report does not say that these effects have already occurred, nor does it provide evidence of a slowdown in property demand. Any such conclusion would require separate data on loan rates, housing registrations, sales, launches, construction activity and repayment stress. The more defensible conclusion is that a two-step rate-hike cycle would make financing conditions an important variable for the urban real-estate and construction sectors.
The currency is another part of the RBI’s dilemma. The rupee has weakened about 6% against the US dollar this year, according to the report. Economists cited both inflation and currency pressures in shifting towards expectations of rate increases. A weaker currency can complicate the inflation outlook when global energy prices are high, while higher rates can carry costs for domestic demand and investment.
Nomura also warned that financing India’s widening current-account deficit could become more challenging amid an unfavourable portfolio-flow backdrop, the fading impact of FCNR(B) inflows and high energy prices. These factors place the RBI’s interest-rate decisions within a broader external-financing problem rather than a narrow response to domestic food prices.
The expectations gathered in the Reuters poll show how quickly the policy outlook has changed. Nearly 60% of economists surveyed—35 of 61—expected the Monetary Policy Committee to raise the repo rate by 25 basis points at its October 5-7 meeting. That would be the first increase since February 2023. A smaller majority, 29 of 53 economists, expected at least one more 25-basis-point increase by December, taking the rate to 5.75%.
The previous month’s survey had placed the median expectation on unchanged rates until March next year. The shift suggests that economists now see the inflation and currency risks as more immediate than they did earlier. Minutes from the RBI’s August policy meeting also showed several policymakers, including Governor Sanjay Malhotra, favouring a rate increase if inflationary pressures broadened.
The possibility of a short hiking cycle is therefore central to the story. Nomura expects food and energy prices to maintain cyclical pressure over the next six months, but it also expects those pressures to dampen demand and bring inflation back towards target. Core consumer inflation is forecast at 4.3% in financial year 2026-27 and 4% in 2027-28.
That forecast leaves the RBI facing a narrow path. It may need to signal that it is prepared to act against broadening inflation, while recognising that weaker crop output, higher food bills and softer discretionary spending could reduce the effectiveness and economic acceptability of repeated rate increases. The Reuters poll expects the repo rate to remain at 5.75% until at least mid-2028, suggesting that even economists anticipating hikes do not necessarily expect a steep or prolonged tightening cycle.
For urban India, the key issue is what happens between the first rate increase and the projected easing in inflation. The supplied report confirms a likely conflict between price stability and demand resilience, but it does not establish how households, housing markets or construction activity will respond. Those outcomes will depend on the transmission of policy rates into lending costs, the durability of income growth, food-price trends and the RBI’s assessment of the inflation outlook.
The October policy meeting is therefore the next important milestone. The central question will be whether the Monetary Policy Committee treats the inflation rise as a temporary shock requiring limited action or as a broadening threat requiring a second increase by December.
