RBI raised repo rate to 5.50% in first hike since February 2023

All six members of the Monetary Policy Committee voted for the 25 basis point increase, the first since February 2023. Four backed the shift in stance from neutral to calibrated tightening, while Nagesh Kumar and Ram Singh opposed it, according to minutes of the meeting released on 21 October. The standing deposit facility rate now stands at 5.25%. The marginal standing facility and bank rate are at 5.75%.

Nirmal K Minda, president of ASSOCHAM, said the tightening signals a cautious approach to macroeconomic and inflation stability. He said higher borrowing costs will have some impact on consumption and can moderate fresh investment and expansion plans, especially for interest-sensitive MSMEs and sectors dependent on credit demand.

Why the committee turned

The case rested on a change in the inflation outlook. Headline consumer price inflation rose to 4.8% in August from 4.5% in July. Core inflation increased to 4.2%, the minutes showed.

The MPC projected inflation at 5.2% for 2026-27, above the RBI's 4% target. It expected the third quarter to touch 6%.

Six per cent is the upper end of the RBI's tolerance band. The band is set at 4% with a two percentage point spread either side. Saugata Bhattacharya pointed to wholesale input prices rising close to 9%. He also pointed to the pass-through of higher costs to consumers. Ram Singh cited the RBI's September household survey. In it, the median three-month-ahead inflation expectation rose to 9.9%. The RBI also pointed to US Treasury yields at 5%, which were drawing foreign portfolio investors out of Indian holdings, TheWire reported.

The RBI cited rising onion and sugar prices. It noted that core inflation had also picked up. The RBI said this indicated some widening of price pressures.

A split committee

Kumar said inflation was largely driven by supply-side factors and showed little sign of overheating, so the neutral stance remained appropriate.

Singh argued that expectations of significant rate increases can undermine demand in interest rate-sensitive sectors. Such expectations can also drag on recent momentum in private investment. He also warned that a tightening stance could signal a prolonged rate-hike cycle. That could undermine growth-supportive measures taken in recent months. Saugata Bhattacharya said too rapid a policy rate adjustment risks constricting growth and therefore growth-led capital flows. Indranil Bhattacharyya called for the MPC to move away from a cautiousness bias. He called for it to act pre-emptively. He cited sharp increases in weighted median and trimmed-mean inflation.

Malhotra said the stance change signalled that rate cuts were off the table in the near term. He said the duration and extent of any tightening would depend on underlying inflation and the spread of price pressures.

Growth outlook

The RBI still projects real GDP growth of 7.1% for the year, Outlook Business reported. It projects 7.2% in the second quarter, 6.9% in the third and 6.8% in the fourth. Malhotra said private consumption remained broadly resilient on continued discretionary spending. He said fixed investment remained strong. Some weakness was visible in non-durable goods and passenger traffic.

What happens next

The next MPC meeting is scheduled for 2-4 December. By then members will have more inflation readings to assess the impact of supply shocks on domestic prices.