India’s retail inflation accelerated to 6.09% in October 2026, moving above the Reserve Bank of India‘s upper tolerance limit of 6% and strengthening expectations of further monetary tightening. The increase has prompted differing assessments from major banks, with SBI expecting a smaller rate hike in December while ICICI Bank sees two additional increases in the current cycle.
The inflation outlook is also influencing fixed-income investment strategies, with SBI Pension Fund planning to increase exposure to state government bonds as it expects their yield premium over central government securities to widen.
October Inflation Strengthens RBI Rate Hike Expectations
India’s Consumer Price Index inflation rose to 6.09% in October from 5.54% in September, reaching its highest level in two years. Food inflation accelerated to 8.94% from 7.74% in the previous month.
The increase exceeded the Reuters economists’ poll expectation of 5.93%. Inflation has remained above the RBI’s 4% medium-term target for five consecutive months, with price pressures spreading across most major CPI categories.
ICICI Bank expects the RBI to raise the repo rate by 25 basis points in December, followed by another 25-basis-point increase in February. The bank said approximately 53% of the weighted CPI basket now has inflation above 4%, compared with 20% in March 2026.
Comparison compiled from figures stated in this article.
It also highlighted higher food prices and rising core inflation, excluding gold and silver, which increased to 3.8% from 3.2%. ICICI Bank raised its FY27 CPI inflation forecast to 5.2% from 5.1% and its FY28 forecast to 5.0% from 4.9%.
State Bank of India, meanwhile, expects a 25-basis-point repo rate hike in December rather than the larger 50-basis-point increase it had previously considered. SBI expects inflation to remain above 6% for another month before easing and believes the repo rate could peak around 6%.
The outlook remains uncertain. Foreign portfolio inflows, a steadier rupee and the possibility of lower crude prices could moderate imported inflation pressures. The RBI’s next Monetary Policy Committee meeting is scheduled for December 2–4, with the policy decision due on December 4.
SBI Pension Fund Looks to Increase State Bond Exposure
The changing interest rate outlook is also shaping fixed-income investment strategies. SBI Pension Fund, which manages approximately $64 billion in assets, plans to increase purchases of state government bonds, according to Bloomberg.
Chief Investment Officer Sandeep Pandey said the fund is following a carry-focused fixed-income strategy, targeting income from higher-yielding securities rather than relying primarily on capital gains.
State bonds currently offer a yield premium over comparable 10-year central government securities. The spread had narrowed to around 60 basis points, after reaching 90 basis points in April.
The fund expects state government bond supply to increase in the fourth quarter as states step up infrastructure spending towards the end of the financial year. SBI Pension Fund held approximately 17% of its total assets in state bonds as of late October.
The fund has also shortened portfolio duration and increased cash holdings to manage elevated interest rates. It continues to favour highly rated corporate bonds with maturities of around five years and plans to increase exposure to large-cap equities.
The inflation outlook and RBI’s next policy decisions will therefore remain important for both government borrowing costs and institutional bond allocation strategies.
What was India’s retail inflation in October 2026?
India’s retail inflation rose to 6.09% in October 2026, compared with 5.54% in September.
Why are RBI rate hike expectations increasing?
Higher food inflation and broader price pressures have pushed headline CPI above the RBI’s 6% upper tolerance limit, increasing expectations of further monetary tightening.
What is SBI’s forecast for the RBI’s December decision?
SBI expects a 25-basis-point repo rate hike in December, a smaller increase than the 50-basis-point move it had previously considered.
How many rate hikes does ICICI Bank expect?
ICICI Bank expects two more 25-basis-point increases, one in December and another in February.
Why is SBI Pension Fund increasing state bond exposure?
The fund expects the yield premium on state government bonds over central government securities to widen, providing potentially attractive carry returns.
