The Economic Research Department (ERD) of the State Bank of India (SBI) has issued a new report. They expect the Reserve Bank of India (RBI) to increase the repo rate (the rate at which RBI lends to banks) by 25 basis points in October. They also predict another 25 basis points hike in December. This news comes as a surprise because most experts recently expected the RBI to keep rates the same for a long time.

There are three main reasons for this change. First, crude oil prices are rising fast and could reach $123 per barrel due to global tensions. Second, CPI inflation (the change in prices consumers pay for goods) is spreading across different sectors like electronics and medicines. Third, global bond yields (the interest paid on government debt) are reaching their highest levels in ten years, especially in the US.

Soumya Kanti Ghosh, the Group Chief Economic Adviser at SBI, says these hikes are necessary to show that the RBI is ready to act. He believes a total increase of 50 basis points (0.50%) will act as a safety net. Even if the immediate inflation numbers seem manageable, the rising cost of imported oil will eventually make everything more expensive for Indian citizens.

For bank officers, this means interest rates on loans and deposits may soon go up. The report suggests that the 10-year government bond yield in India could rise towards 7.15% or higher. This happens because when oil prices go up, investors worry about the economy and demand higher returns. Banks will need to manage their liquidity (cash flow) carefully as the festive season approaches.

Customers might see their EMI (Equated Monthly Installment) costs rise if banks pass on these rate hikes. The SBI report notes that companies are already seeing higher input costs. Soon, these companies will pass those costs to the final customers, leading to higher prices for everyday items. The RBI will meet in October to make the final decision on these rates.

Looking ahead, the banking system will face tight liquidity during the festival months. The SBI experts believe the RBI might prefer raising rates instead of using other tools like increasing the Cash Reserve Ratio (the share of deposits banks must keep with RBI). All eyes are now on the next MPC (Monetary Policy Committee) meeting to see if the RBI follows this path.