RBI Raises Repo Rate to 5.5%
The MPC raised the benchmark rate by 25 basis points and shifted to calibrated tightening as inflation risks broadened despite resilient economic growth.
The Reserve Bank of India has raised the policy repo rate by 25 basis points to 5.50% from 5.25%, marking its first rate increase since February 2023. The decision was taken unanimously by the six-member Monetary Policy Committee as the central bank responded to renewed inflationary pressures.
Along with the rate increase, the RBI shifted its monetary policy stance from neutral to calibrated tightening. Governor Sanjay Malhotra said the inflation outlook was no longer as benign as it had been previously and indicated that monetary policy would need to remain alert to the possibility of broader and second-round price pressures.
The RBI has projected consumer price inflation at an average of 5.8% over the next three quarters of FY27. Core inflation is projected at 4.4% for the financial year, compared with the earlier estimate of 4.3%.
Inflationary pressures have strengthened amid elevated crude oil prices and the wider economic impact of the West Asia conflict. August consumer inflation stood at 4.82%, remaining above the RBI’s 4% medium-term target for a third consecutive month.
At the same time, the RBI upgraded its assessment of economic growth. The central bank raised its FY27 real GDP growth forecast to 7.1% from 6.7%, citing resilient domestic activity, private consumption and broad-based economic momentum.
The second-quarter FY27 growth projection was raised to 7.2% from 6.4%, while the third-quarter forecast was increased to 6.9% from 6.5%. The fourth-quarter projection was retained at 6.8%. The RBI's growth assessment reflects the economy's stronger-than-expected performance, including 7.8% GDP growth in the April-June quarter.
The rate hike is expected to increase borrowing costs for banks and could feed into lending rates for home, vehicle and personal loans. At the same time, higher policy rates can support deposit returns and are intended to contain inflation by moderating demand and inflation expectations.
Governor Malhotra also indicated that near-term rate cuts are not currently on the table, saying future policy action would depend on evolving inflation and economic conditions and could involve another hike or a pause. The October decision therefore signals a significant shift from the prolonged easing cycle that had brought the repo rate down to 5.25%.