The RBI raised the repo rate by 25 bps to 5.50% to fight rising inflation, shifting its policy stance to ‘calibrated tightening’. This decision was driven by strong domestic growth, rising global yields, and inflation projected to rise.
The Reserve Bank of India on Wednesday raised its policy repo rate by 25 basis points to 5.50 per cent, 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 per cent and retained a neutral stance while seeking greater clarity on the inflation outlook and 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”
Key Rates and Policy Stance
Following the repo rate increase, the standing deposit facility (SDF) rate stands at 5.25 per cent, while the marginal standing facility (MSF) rate and Bank Rate are at 5.75 per cent. The MPC stance was changed to a calibrated tightening by a majority.
Factors Influencing the Decision
The decision comes amid rising price pressures. India’s CPI inflation stood at 4.82 per cent in August, while economists and research reports have projected inflation to move above 5 per cent during FY27. Inflation is expected to peak around 5.9 per cent in the third quarter, with deficient monsoon conditions and crude oil prices around USD 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 per cent. 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 USD 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 per cent in Q1 FY27, while high-frequency indicators have pointed to continued strength in domestic demand, manufacturing and services.
Future Monetary Policy Outlook
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 per cent by the end of FY27, depending on inflation, oil prices and global financial conditions.
(ANI)
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