THEBUSINESSBYTES BUREAU

MUMBAI, OCTOBER 7, 2026

The Reserve Bank of India on Wednesday raised its benchmark repo rate by 25 basis points to 5.5 per cent, marking a sharp reversal in its monetary policy trajectory as it seeks to contain rising inflation amid the continuing crisis in West Asia.

The rate hike, the first in nearly three-and-a-half years, is set to push up borrowing costs across the economy, making home, vehicle and corporate loans more expensive and potentially raising EMIs for existing borrowers.

Announcing the bi-monthly monetary policy, RBI Governor Sanjay Malhotra said the Monetary Policy Committee (MPC) had unanimously decided to raise the policy repo rate by 25 basis points.

The move marks a significant departure from the central bank’s recent rate-cutting cycle. The RBI’s last repo rate hike came in February 2023, when it raised the policy rate by 25 basis points to 6.5 per cent. The central bank then kept rates unchanged through 2023-24 before beginning its rate-cut cycle in 2025.

More significant than the rate increase itself was the MPC’s decision to shift its policy stance to ‘calibrated tightening’ from ‘neutral’, signalling that the central bank is prepared to tighten both banking-system liquidity and policy rates to contain inflation.

The change in stance also makes a near-term rate cut unlikely, economists said, while raising expectations of further tightening in the months ahead.

Radhika Piplani, Chief Economist, Motilal Oswal Financial Services Ltd, said the 25-basis-point hike was widely expected by markets, but the change in stance was the more important signal.

 “The RBI raised the repo rate by 25bps to 5.50 per cent, a move the markets had widely expected. More significantly, it shifted its policy stance from neutral to calibrated tightening,” Piplani said.

She expects another 75 basis points of tightening in the current cycle, taking the repo rate to 6.25 per cent, including a 25-basis-point hike in December, which she said markets have already largely priced in.

The policy action comes as retail inflation has started moving higher. Consumer price inflation rose to 4.82% in August from 4.45% in July, adding to concerns over the persistence of price pressures amid geopolitical uncertainty and volatile commodity prices.

The RBI raised its full-year inflation forecast to 5.2 per cent, in line with Piplani’s estimate. She said the central bank appeared cautious on inflation but relatively comfortable with the growth outlook.

The RBI has also projected inflation at 6 per cent in the third quarter, according to Sumit Singhania, Head of Research, Bajaj Broking.

 

Singhania said the 25-basis-point hike was “defensible”, but the shift to calibrated tightening mattered more than the rate increase itself as it effectively ruled out near-term rate cuts.

 “With CPI rising to 4.8 per cent in August and projected at 6 per cent in Q3, at the upper edge of the tolerance band, acting now makes sense,” Singhania said.

He noted that the economy’s projected 7.1 per cent growth gives it enough room to absorb tighter financial conditions.

Despite the tightening bias, the RBI remained relatively upbeat about economic growth, raising its FY27 GDP growth forecast to 7.1 per cent from 6.7 per cent.

Piplani said she expects real GDP growth to be slightly higher at 7.2 per cent, arguing that India’s growth story remains intact despite global headwinds and a firmer domestic interest-rate environment.

 “The private capex cycle appears to be regaining momentum, even with global headwinds and a firmer domestic rate environment,” she said.

Strong bank credit growth should continue to support activity across large, medium and small enterprises, she added, while services and the banking sector in particular are likely to register robust growth.

The RBI’s decision also comes against a challenging global backdrop. Major central banks have been tightening monetary conditions as they grapple with persistent inflation and higher energy prices.

The US Federal Reserve raised its benchmark rate by 25 basis points in September, while markets continue to price in the possibility of another hike by December. The October 28 FOMC meeting remains a key risk, Singhania said.

The European Central Bank had also raised its key interest rate by 25 basis points before the Fed’s move.

According to Singhania, the global rate environment is putting pressure on the rupee and limiting the RBI’s room to maintain an accommodative stance.

While the repo-rate decision was unanimous, the stance vote was 4-2, indicating that two MPC members preferred to retain greater policy flexibility rather than commit to a tightening bias.

Singhania pointed out that much of the current inflation pressure is supply-driven, stemming from factors such as the monsoon, El Niño and energy prices. Rate hikes, therefore, have limited ability to directly address the underlying sources of inflation.

 “The real aim is to prevent second-round effects,” he said.

Core inflation, excluding precious metals, stands at around 2.9%, suggesting that underlying price pressures remain relatively contained.

 “If that holds and price pressures don't broaden, the RBI would do best to pause at 5.50 per cent in December, though a further Fed hike could test that call,” Singhania said.

The RBI’s latest move has opened up a sharper debate over how far the tightening cycle could go. While Piplani expects the repo rate to rise by another 75 basis points to 6.25 per cent, Singhania sees a case for the central bank to pause at 5.50 per cent in December if underlying inflation remains contained.

For borrowers, however, the immediate implication is clearer: higher policy rates are likely to translate into costlier credit, putting upward pressure on EMIs for households and borrowing costs for companies.

The RBI’s message is equally clear — with inflation risks resurfacing and global monetary conditions tightening, growth remains important, but price stability is once again taking centre stage.