It will affect festival-linked consumer spending, especially the purchases of automobiles and white goods on EMIs during the auspicious days of Dhanteras-Diwali.

Factors like the escalating West Asia crisis, an uncomfortable inflationary situation, and prolonged pressure on domestic currency may prompt RBI to go in for a rate hike. Several reports, including SBI Research Ecowrap, and economists are talking about a 25-basis point increase in the benchmark interest rate to 5.50% in the upcoming monetary policy.

According to experts, it is going to be the most “inconvenient” time for a rate hike, especially for retailers, as interest rates on most loans are linked to the benchmark rates and hence would go up automatically.

Manufacturers too may find it difficult to push sales during the festive season, wherein aggressive discounts and incentives are offered to attract customers.

The hike in the benchmark interest rate by the RBI will also escalate problems for the industry, as it would have to pay more towards interest. The interest liability for the industry has remained stable since December 2025.

RBI’s Monetary Policy Meeting

The RBI’s rate-setting Monetary Policy Committee (MPC), which will be meeting from 5-7 October, will take into account the global situation, elevated crude oil prices in the international market, and firming prices in the domestic market before deciding on the benchmark interest rate.

With the US Federal Reserve and several other major central banks raising interest rates, it would be difficult for the RBI to continue with the pause on the rate front. Governor Sanjay Malhotra has kept the benchmark interest rate unchanged since December 2025 at 5.25%.

Although none of the developments individually determines the RBI's decision, the central bank is expected to act in a way to keep the Consumer Price Index (CPI) or retail inflation around 4%.  The other big concern for the RBI at this point will be to prevent the outflow of foreign portfolio investment, especially after the hike in interest rates by the US Federal Reserve and the European Central Bank.

Global Monetary Policy Landscape

Major central banks, including the US Federal Reserve, European Central Bank, and Bank of Japan, have raised their benchmark interest rates by 25 basis points in September.  Although the RBI is under no obligation to mechanically follow other central banks, it cannot ignore what is happening elsewhere in the world.

The Federal Reserve's 16 September decision to unanimously raise the federal funds target range by 25 basis points to 3.75-4%, citing elevated inflation and resilient domestic spending, is important for emerging markets.

For India, higher US Treasury yields can make dollar assets relatively more attractive, potentially affecting foreign portfolio flows. Also, a stronger dollar can put pressure on the rupee, increasing the domestic cost of imported commodities such as crude oil. The interest-rate differential is therefore relevant and ought to be maintained.

The European Central Bank raised its three key rates by 25 basis points in September, citing continuing inflationary pressure from the West Asia conflict. Its deposit rate is now 2.50%. The Bank of Japan raised its policy rate to 1.25% on 18 September, its highest level in 31 years, as it sought to contain the risk of inflation overshooting its 2% target. The Reserve Bank of Australia raised its official cash rate by 25 basis points on 29 September, raising it to a 15-year high of 4.60%.

Central banks in the Gulf have followed the Fed more directly because several currencies are pegged to the US dollar. Saudi Central Bank, Central Bank of UAE, Qatar Central Bank, Central Bank of Oman, and Central Bank of Bahrain have increased their benchmark interest rates by 25 basis points in September.

The Bank of England, in contrast, held its bank rate at 3.75% in September. The decision, however, was accompanied by concern over higher energy prices and the possibility that prolonged inflation could require further tightening.

Taken together, these decisions indicate a renewed global concern about inflation. The common factor is the energy shock. As regards the RBI, it cannot ignore international policy developments and their likely impact on the domestic economy.

Spiralling Crude Prices

For India, the more immediate threat relates to spiralling crude oil prices in the international market.

India imports the bulk of its crude requirement. Consequently, a sustained rise in international oil prices impacts the import bill, the current account, the rupee, transportation costs, fuel prices, and the cost of production.

Renewed tensions in West Asia have already pushed Brent crude above US$ 100 a barrel at various points in September. The risk for India is not simply a temporary increase in petrol or diesel prices. Higher crude can raise freight and logistics costs, increase the cost of manufactured goods, and put pressure on airlines and other transport-intensive industries. Fertiliser prices can also rise because energy is an important input into fertiliser production. Higher energy costs can eventually feed into food prices, particularly where transportation and processing form a significant part of the final cost.

A prolonged crisis could create an additional problem by disrupting shipping routes and supply chains. The RBI itself has warned that the West Asia conflict is disrupting key trade routes and supply chains and increasing volatility in crude oil, currencies and financial markets. 

If the oil price retreats, the inflation effect may remain manageable. If it stays substantially above the US$ 100 level for several months, the second-round effects become much more important.

SBI Research Ecowrap has warned that continued high oil prices could push inflation considerably higher and recommended “25 bps hike in October and December MPC each, and then to pause and take stock with upcoming data…”

ICRA Chief Economist Aditi Nayar said if crude oil prices remain elevated in the run up to the upcoming MPC meeting, “then the expected rate hike could get pre-poned to October 2026 from December 2026.”

According to Dharmakirti Joshi, Chief Economist, Crisil Ltd, “The macroeconomic backdrop is changing. Strong growth has sustained demand, while renewed conflict in West Asia is adding fresh pressure on input costs. Together, these forces are reducing the latitude for monetary policy to remain on the sidelines.”

Inflation Within Band, But Direction Matters

Retail inflation increased to 4.82% in August from 4.45% in July, according to the Ministry of Statistics and Programme Implementation. Food inflation was considerably higher at 5.95%, compared with 5.52% in July. Rural CPI inflation reached 5.23%, while urban inflation was 4.31%. 

Inflation therefore remains within the RBI's 2-6% tolerance band. But it is above the 4% medium-term target, and August marked the third consecutive month of increase.

More significantly, the price pressures appear to be broadening. Core inflation, excluding volatile food and fuel components, rose to about 4.2% in August from 3.86% in July. Inflation was also spreading beyond food and fuel to categories such as clothing, household goods, and education. The Wholesale Price Index (WPI) has remained near the double-digit mark for the past several months and higher wholesale prices will eventually spill over to retail.

Governor Malhotra had earlier said that the MPC would reassess growth-inflation dynamics in October, with particular attention to persistence, inflation expectations, and generalisation of price pressures. 

The RBI's August policy had projected FY2026-27 inflation at 5%, with quarterly projections of 4.7% for the second quarter, 5.9% for the third and 5.5% for the fourth quarter. The subsequent rise in oil prices and August inflation means some of those assumptions are now under pressure.

Inconvenient Time For Rate Hike

If the RBI does tighten monetary policy, a 25-basis-point increase would allow it to send a clear anti-inflationary signal without imposing any large shock on demand.

On the other hand, an increase from 5.25% to 5.50% would raise the cost of funds for banks and, eventually, for borrowers. Floating-rate home loans, corporate loans, and other loans linked to external benchmarks would be particularly sensitive.

For retailers, manufacturers, and banks, a rate hike could not come at a more inconvenient time, as Dhanteras and Diwali traditionally generate a significant concentration of annual demand. The immediate impact would be felt in cars, two-wheelers, consumer durables, electronics, and housing, where consumers often depend on financing.

Higher EMIs could make buyers postpone purchases, opt for cheaper models or increase their down payments. For households already servicing home, auto or personal loans, higher interest costs could also reduce disposable income available for festive purchases.

The impact on cash purchases of groceries, apparel, jewellery, and other small-ticket items would be less direct. However, if higher rates persist, households may become more cautious about discretionary spending and increase savings, potentially moderating the overall festive consumption impulse.