Analysts warn of market volatility as inflation and bond yields rise

Analysts have warned of potential market volatility due to a surge in India's retail inflation figures and rising bond yields. According to a Business Standard report, analysts are betting on the possibility of interest rate hikes in December following the increase in retail inflation and a jump in US bond yields.

According to official data released by the Ministry of Statistics and Programme Implementation (MoSPI), Consumer Price Index (CPI) based retail inflation rose to 6.09% in October 2026. As per an Amar Ujala report, this figure has crossed the upper tolerance limit of 6% set by the Reserve Bank of India (RBI) for the first time in two years. This rate was 5.5% in September 2026, increasing to 6.09% in October. With this, an increase in consumer prices has been recorded for the 12th consecutive month.

According to a Mint report, a survey of 15 economists had predicted inflation would reach 6% in October, with estimates ranging between 5.9% and 6.2%. The main reasons for this increase are the rise in food prices and an adverse base effect. Specifically, in the food and beverages section, which holds a large share of the consumer inflation basket, Icra predicted inflation of over 8% in October. According to Icra's Chief Economist Aditi Nayar, this rise in headline inflation is also due to the adverse base following the rationalisation of GST.

As per a Sandesh (Business) report, inflation is weighing heavily on ordinary citizens. Onion prices have nearly doubled, with an increase of about 99.6%. Additionally, prices of essential commodities such as pulses, rice, milk, and edible oil continue to rise. According to a Bank of Baroda report, prices of 20 essential commodities recorded a year-on-year increase of 11.1% in October. Weather and the El Nino factor are major reasons behind the inflation, leading to lower rainfall in key agricultural producing states such as Karnataka, Maharashtra, Andhra Pradesh, and Rajasthan.

Due to this rising inflation, all eyes are now on the Reserve Bank of India (RBI) Monetary Policy Committee (MPC) meeting, scheduled for December 2 to 4. According to a Mint report, IDFC First Bank Chief Economist Gaura Sengupta stated, "We expect the RBI to increase policy rates by 25 bps. We do not feel a larger increase of 50 bps is necessary in December because the rupee/dollar exchange rate has stabilised following the central bank's actions."

If the RBI increases the repo rate by another 0.25% to control inflation, it will have a direct impact on bank loans. According to Sandesh (Business), this will increase the monthly EMI for home loan and other loan borrowers. Previously, the central bank had raised the repo rate to 5.50%. In the October policy review, the MPC unanimously raised the repo rate by 25 basis points to 5.5% and changed its policy stance to 'calibrated tightening'. This indicates that a reduction in interest rates is unlikely in the near future.

Expectations of rising interest rates pushed the benchmark 10-year government bond yield to a four-year high at the end of October. According to a Mint report, Brent crude oil prices have decreased slightly due to expectations of reduced tension in West Asia, but they remain at high levels. Drought conditions in several parts of the country could also increase price pressures.

In its October monetary policy review, the RBI adopted a more cautious approach regarding the inflation outlook. The central bank has increased the inflation projection for 2026-27 from 5% to 5.2%. The RBI has cited inadequate monsoon rainfall, the ongoing El Nino condition, and high energy and commodity prices as risks. The RBI expects inflation to average 6% during October-December and subsequently decrease to 5.7% in January-March. The core inflation projection for the entire financial year has been kept at 4.4%.

The Monetary Policy Committee (MPC) expressed concern over the broadening of food price pressures, including sharp increases in the prices of commodities such as sugar and onions. The committee warned that high energy and commodity prices could increase supply-side inflation. It is now likely that food inflation will remain high in the coming months; therefore, whether headline inflation falls below October levels will depend on price movements after the kharif crop and whether energy costs decrease.

According to an Amar Ujala report, the government had set a target for the central bank to keep the inflation rate between 4 and 6 per cent. The rate of 6.09% in October is outside this target, posing a major challenge for the central bank. Due to the rise in prices of vegetables and protein-rich food items during the festive season, a significant burden has fallen on the kitchen budgets of the common man.