RBI Hikes Repo Rate to 5.5%, Signals Tighter Policy

• RBI raises repo rate by 25 bps to 5.5%
• Policy stance shifted to calibrated tightening
• GDP growth forecast raised to 7.1%
• Core inflation forecast increased to 4.4%

GG News Bureau
Mumbai, 7th Oct: The Reserve Bank of India (RBI) on Wednesday raised the repo rate by 25 basis points to 5.5 per cent, marking the first increase in the key policy rate since February 2023 as the central bank responds to rising inflationary pressures, higher oil prices and a weakening rupee.

The decision was taken unanimously by the Monetary Policy Committee (MPC), headed by RBI Governor Sanjay Malhotra. The repo rate, at which the central bank lends to commercial banks, has been increased from 5.25 per cent to 5.5 per cent.

The RBI has also changed its monetary policy stance from “neutral” to “calibrated tightening”, the first such shift since 2018.

RBI signals no near-term rate cuts
Addressing the MPC decision, Governor Malhotra said global inflation was expected to rise while trade uncertainty continued to weigh on the outlook.

“Global inflation is expected to rise. Trade uncertainty continues to linger. Global sentiment remains fragile. The impact of the Iran war could also disrupt trade and supply chains,” Malhotra said.

At the same time, he said the Indian economy remained strong and was expected to remain resilient.

The shift to calibrated tightening signals that the RBI is now leaning towards tighter monetary policy if inflationary pressures persist. Unlike a neutral stance, which leaves room for either rate hikes or cuts depending on economic conditions, the new stance indicates that rate cuts are off the table in the near term, while another hike remains possible if inflation risks intensify.

Growth forecast raised to 7.1%
The rate hike comes despite an improved assessment of India’s growth prospects.

The RBI has raised its real GDP growth forecast for the current financial year to 7.1 per cent from 6.7 per cent earlier.

The central bank said economic activity maintained momentum during the second quarter, covering July to September. Manufacturing activity has remained resilient despite higher cost pressures, while the services sector continues to show broad-based stability.

Fixed investment has also remained strong, with private consumption and investment expected to remain key drivers of economic growth. Net exports have continued to remain positive.

Inflation risks remain
The RBI has raised its core inflation forecast for the current financial year to 4.4 per cent from 4.3 per cent earlier.

The central bank’s decision comes against a backdrop of higher global energy prices, a weaker rupee and continuing uncertainty over international trade and supply chains.

Malhotra highlighted the potential impact of geopolitical developments, including the Iran war, on global trade and supply chains.

Monsoon, demand and supply chains remain risks
Despite the stronger overall outlook, the RBI identified several areas of concern.

Weakness in non-durable goods and domestic air traffic could weigh on economic activity, while supply-chain disruptions remain a risk to growth.

A weak monsoon and the possibility of an El Niño event could also affect the Rabi season. However, the central bank expects rural and urban demand to remain sustained.

Industry warns of higher cost of capital
Reacting to the rate hike, Suraj Mehta, Chief Strategy Officer, HNGIL, said the 25-basis-point increase was understandable given current inflationary pressures but would marginally raise the cost of capital for manufacturers already facing higher energy and input costs.

He said domestic demand and India’s growth fundamentals remained supportive despite the challenging global environment and supply-chain disruptions.

Mehta stressed that a calibrated monetary policy approach, combined with continued efforts to ease supply-side constraints, would be important for sustaining industrial investment and manufacturing momentum.

The RBI’s latest decision therefore puts greater emphasis on containing inflation while maintaining confidence in India’s underlying growth momentum, with the possibility of further policy action dependent on how inflation, global conditions and domestic economic activity evolve.