The six-member Monetary Policy Committee of the RBI, chaired by Governor Sanjay Malhotra, increased the repo rate after a three-day review as higher food and fuel prices, rising crude oil costs, supply-side risks and changing global monetary conditions reduced the scope for keeping borrowing costs unchanged.
Quick Glance
- RBI raises the repo rate by 25 basis points to 5.50 per cent amid rising inflation and global risks.
- The central bank retains its FY27 real GDP growth forecast at 7.1 per cent.
- FY27 inflation is projected at 5.2 per cent, with food, fuel and supply-side risks remaining concerns.
The Reserve Bank of India (RBI) raised its benchmark repo rate by 25 basis points to 5.50 per cent on Wednesday, responding to broader inflationary pressures and a difficult global economic environment. At the same time, the central bank retained its real GDP growth projection for 2026-27 at 7.1 per cent. It also projected consumer price inflation at 5.2 per cent for the year.
RBI shifts towards tighter monetary policy
The latest decision marks a significant shift in the RBI’s policy response after the central bank kept the repo rate at 5.25 per cent for an extended period. Economists had expected a rate increase, which would represent the first hike since February 2023.
The RBI also adjusted other policy rates. It set the Standing Deposit Facility rate at 5.25 per cent and raised the Marginal Standing Facility rate and Bank Rate to 5.75 per cent.
The decision came against a backdrop of rising domestic inflation and growing uncertainty in global markets. Governor Sanjay Malhotra also warned that global inflation could rise sharply, potentially prompting major central banks to tighten monetary policy.
RBI holds FY27 growth forecast at 7.1%
Despite the inflation risks, the RBI maintained its real GDP growth forecast for 2026-27 at 7.1 per cent.
The central bank’s projections indicate continued confidence in domestic economic activity. It expects GDP growth of 7.2 per cent in the second quarter, followed by 6.9 per cent in the third quarter and 6.8 per cent in the fourth quarter.
The RBI has also projected 7.1 per cent growth for the first quarter of 2027-28.
Malhotra said domestic economic activity had remained resilient despite global headwinds. Real GDP growth reached 7.8 per cent in the first quarter.
Business activity has also remained on an expansionary path. Manufacturing and services Purchasing Managers’ Index readings stayed in growth territory during the second quarter. However, the pace of expansion moderated from the previous quarter.
FY27 inflation forecast stands at 5.2%
The RBI’s inflation outlook presents a more challenging picture. It projected consumer price inflation at 5.2 per cent for 2026-27.
The central bank expects inflation to average 4.9 per cent in the second quarter, 6 per cent in the third quarter and 5.7 per cent in the fourth quarter. For the first quarter of 2027-28, it projected inflation at 5.6 per cent.
Core inflation for 2026-27 is estimated at 4.4 per cent.
Malhotra pointed out that CPI inflation increased to 4.8 per cent in August from 4.5 per cent in July. Higher food and fuel inflation contributed significantly to the increase.
Food prices and core inflation raise concerns
The RBI said food price pressures have become broader. Sugar and onion recorded significant increases, adding to concerns over the inflation outlook.
Fuel inflation also increased in August. However, the RBI attributed much of that movement to unfavourable base effects.
Underlying price pressures have also started to widen. Core inflation rose to 4.2 per cent in August, while core inflation excluding precious metals reached 2.9 per cent.
The share of items in the headline CPI basket registering inflation above 4 per cent also increased steadily. It reached around 37 per cent in August.
The RBI is monitoring inflation expectations, company pricing behaviour, core inflation trends and diffusion indices to assess how widely price pressures are spreading across the economy.
Weather and crude oil add to inflation risks
Supply-side pressures could remain a key challenge. The RBI identified deficient monsoon conditions, ongoing El Nino conditions and elevated energy and other commodity prices as potential risks.
Higher input costs could also continue to pass through to consumer prices.
Crude oil prices have added another layer of pressure. Prices have moved above $100 a barrel amid the West Asia crisis. Rising crude prices, higher global bond yields and increasing inflation have narrowed the RBI’s room to leave interest rates unchanged.
SBI Research backs pre-emptive action
The rate increase also comes amid expectations of further monetary tightening if inflation remains elevated.
SBI Research had assessed that the balance of risks strongly favoured a 25-basis-point hike. It cited widening inflationary pressures, deteriorating global macroeconomic conditions, changing liquidity conditions and renewed global repricing of risks.
The research assessment favoured early action rather than allowing inflationary pressures to move further ahead of monetary policy.
With CPI inflation rising to 4.82 per cent in August from 4.45 per cent in July, the RBI now faces a difficult balance between supporting growth and containing inflation. Strong El Nino conditions and below-normal October rainfall could also create risks for Rabi output, potentially adding to food-price pressures.
The latest policy decision therefore combines continued confidence in India’s domestic growth momentum with a stronger focus on controlling inflation and managing external risks. (Edited by Enewstime Desk)