RBI raises repo rate to 5.5% and shifts stance to calibrated tightening

The decision

The six-member Monetary Policy Committee voted unanimously for the increase, lifting the repo rate from 5.25%. The previous hike came in February 2023, to 6.50%, after which the RBI held rates through 2023-24 and cut through 2025. Four of the six members backed the shift in stance to calibrated tightening, with two against. The standing deposit facility rate now stands at 5.25%, while the marginal standing facility rate and the bank rate are at 5.75%. A PTI poll of 16 economists and bankers had expected the 25 basis point move, though opinion was split on whether the stance would change.

The RBI said strong growth in monetary and credit aggregates was an additional risk, even as evidence of demand-side inflation pressures remained limited.

"Rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook," Governor Sanjay Malhotra said.

Why it matters

The RBI now projects CPI inflation at 5.2% for FY27, up from its earlier 5.0% forecast. Its quarterly path has inflation at 4.9% in the second quarter, 6% in the third and 5.7% in the fourth. Consumer price inflation rose to 4.82% in August from 4.45% in July, an eight-month high and the highest under the new CPI series, which uses 2024 as its base year. Business Standard described the same print as a 20-month high. Wholesale inflation has hovered close to 10% in the four months since May, and high wholesale prices typically reach retail shelves with a lag. Economists surveyed before the decision said a hike was needed to keep real interest rates from turning negative in coming quarters. BankBazaar chief executive Adhil Shetty said the shift to calibrated tightening showed the RBI was giving greater weight to inflation risks.

CFOs at Indian companies said a further 25 to 50 basis points would raise the cost of capital at the margin, though investment still turns on demand visibility.

Growth forecast and the demand mix

The RBI raised its FY27 GDP growth forecast to 7.1% from 6.7%, the level it set in August. It projects growth of 7.2% in the second quarter, 6.9% in the third and 6.8% in the fourth. That upgrade follows April-June growth of 7.8%, which came in faster than expected. The ADB, the OECD, Fitch Ratings and S&P Global Ratings raised their own FY27 projections to between 6.9% and 7.1% in September. Merchandise exports reached $216 billion in April to August, up nearly 18% year on year.

Mridul Saggar, a former RBI executive director, does not see 7.1% as too optimistic. He expects the effect of higher rates on growth to emerge with a lag, so the economy can stay relatively strong in the short term.

Malhotra said private consumption remained broadly resilient and fixed investment stayed strong, though he flagged weakness in non-durable goods and "domestic care passenger traffic". CFOs said corporate balance sheets are healthier than in past tightening cycles and debt levels are comfortable.

Inflation and external pressure

Brent crude stayed above $100 a barrel on 7 October as the West Asia conflict continued, and the rupee traded above 96 against the dollar. CFOs warned that a weak monsoon and El Nino conditions put the Rabi crop and food prices at risk. Manish Gangwal, CFO of Gulf Oil Lubricants, said higher crude was pushing up the cost of base oil. He said further price increases could not be ruled out if crude held above $100. The US-Iran war was in its eighth month, and global bond yields sat at multi-year highs.

Malhotra said it was difficult to separate second-round effects from the indirect impact of supply-side pressures on production costs. Both show up in core inflation and diffusion indices, he said. He saw some evidence of elevated inflation expectations but limited signs of supply pressures becoming embedded in pricing behaviour.

What happens next

Citi India's Samiran Chakraborty told CNBC-TV18 that Citi had expected 50 to 75 basis points of hikes in this cycle. The stance change pushed his view toward the 75 basis point end. He sees 6% as a level where the RBI could pause, arguing that base effects could bring inflation closer to 4-4.5% by early FY28. Jhingan also puts the terminal rate at 6% for now, cautioning that the outlook could change if India does not receive sufficient capital inflows over the next one or two years. The RBI expects inflation to average 5.8% over the next three quarters. Malhotra said the duration and extent of the hiking cycle would depend on actual growth and inflation, the broadening of price pressures and second-round effects of the supply shock.