RBI raises repo rate by 25 bps to 5.5 pc as per market expectations as inflation risks strengthen

MUMBAI, INDIA: The Reserve Bank of India on Wednesday raised its policy repo rate by 25 basis points to 5.50%, beginning a rate-hike cycle as rising inflation risks, elevated global yields and resilient domestic growth strengthened the case for tighter monetary policy.

The decision by the Monetary Policy Committee marks a shift from its August policy, when it kept the repo rate unchanged at 5.25% and retained a neutral stance while seeking greater clarity on the inflation outlook and the growth-inflation balance.

In his statement, RBI Governor Sanjay Malhotra said, "After a detailed assessment of the evolving macroeconomic and financial conditions, developments and the outlook, the MPC voted unanimously to increase the policy repo rate by 25 basis points."

Following the repo rate increase, the standing deposit facility (SDF) rate stands at 5.25%, while the marginal standing facility (MSF) rate and Bank Rate are at 5.75%. The MPC's stance was changed to calibrated tightening by a majority.

The decision comes amid rising price pressures. India's CPI inflation stood at 4.82% in August, while economists and research reports have projected inflation to move above 5% during FY27. Inflation is expected to peak around 5.9% in the third quarter, with deficient monsoon conditions and crude oil prices around $100 a barrel adding to the risks.

Global financial conditions have also become less supportive. The US Federal Reserve raised its policy rate by 25 basis points in September, while US 10-year Treasury yields have remained elevated at around 5.3%. The rupee was trading at 96.36 per US dollar at the time of filing this report.

Liquidity was evaluated as another key consideration. The RBI's special forex swap facility mobilised $132.98 billion through FCNR(B) deposits as of August 31, adding substantial liquidity to the banking system and increasing the need for calibrated absorption.

The RBI's decision also comes against resilient domestic activity. India's economy grew 7.8% in Q1 FY27, while high-frequency indicators have pointed to continued strength in domestic demand, manufacturing and services.

The latest move is expected to set the direction for monetary policy in the coming months, with economists earlier seeing scope for cumulative tightening of up to 75 basis points and the repo rate potentially reaching around 6% by the end of FY27, depending on inflation, oil prices and global financial conditions.

By RSS/ANI