RBI raises repo rate by 25 bps to 5.50%, shifts policy towards tightening

The Reserve Bank of India on Wednesday raised the policy repo rate by 25 basis points to 5.50 per cent, moving towards tighter monetary policy as inflation risks, elevated global yields and resilient domestic growth added pressure for a rate hike.

The decision by the Monetary Policy Committee (MPC) marks a departure from its August policy, when it kept the repo rate unchanged at 5.25 per cent and maintained a neutral stance while assessing the inflation outlook and the balance between growth and inflation.

RBI Governor Sanjay Malhotra said the decision followed a detailed review of the changing economic and financial environment.

“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”

With the repo rate now at 5.50 per cent, the standing deposit facility (SDF) rate stands at 5.25 per cent. The marginal standing facility (MSF) rate and Bank Rate have been fixed at 5.75 per cent. The MPC also shifted its stance to calibrated tightening by a majority.

Inflation has emerged as a key factor behind the policy decision. India's CPI inflation was recorded at 4.82 per cent in August, while economists and research reports have projected inflation to rise above 5 per cent during FY27.

Inflation is expected to peak at around 5.9 per cent in the third quarter. Deficient monsoon conditions and crude oil prices near USD 100 a barrel have added to the inflation risks.

External financial conditions have also turned less favourable. 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 per cent. At the time of filing the report, the rupee was trading at 96.36 per US dollar.

Liquidity was another consideration for the RBI. Its special forex swap facility had mobilised USD 132.98 billion through FCNR(B) deposits as of August 31, bringing substantial liquidity into the banking system and increasing the need for calibrated absorption.

At the same time, domestic economic activity has remained resilient. India's economy expanded 7.8 per cent in Q1 FY27, while high-frequency indicators pointed to continued strength in domestic demand, manufacturing and services.

The latest rate increase is expected to influence the direction of monetary policy over the coming months. Economists had earlier estimated scope for cumulative tightening of up to 75 basis points, with the repo rate potentially reaching around 6 per cent by the end of FY27, depending on inflation, crude oil prices and global financial conditions.