Mumbai: The Reserve Bank of India (RBI) on Wednesday raised its benchmark repo rate by 25 basis points to 5.5 percent, its first increase in nearly four years, and signalled further hikes as rising inflation and a weakening currency prompted a policy shift.
The six-member Monetary Policy Committee (MPC) voted unanimously for the increase, the first since Governor Sanjay Malhotra took office in December 2024. While the hike was widely expected, the RBI surprised markets by shifting its stance from ‘neutral’ to ‘calibrated tightening’, ruling out an early reversal in rates.
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"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," Malhotra said announcing the MPC decisions.
He cautioned that the timing and extent of further tightening would depend on inflation and growth, particularly underlying price pressures and whether supply shocks become embedded in the broader economy.
India joins major central banks raising rates as higher oil prices triggered by the Iran war fuel inflation, erode purchasing power and put pressure on currencies. Deficient rainfall linked to El Nino has compounded the price shock.
The RBI raised its retail inflation forecast for 2026-27 to 5.2 percent, with inflation projected at 6 percent in the third quarter and 5.7 percent in the fourth.
Consumer-price inflation rose to 4.82 percent in August, remaining above the RBI’s 4 percent medium-term target for the third consecutive month. Core inflation accelerated to 4.2 percent.
The central bank said inflation risks were no longer as benign as a year earlier, citing higher food and fuel prices, deficient monsoon rainfall, El Nino conditions and renewed volatility in international oil markets.
"There are also early signs of inflation becoming generalised," he said, pointing to rising core inflation and elevated price increases across a larger share of the consumer price index basket.
Oil has emerged as a key risk following the renewed escalation of the West Asia conflict. The Indian crude basket averaged USD 116.1 a barrel in September, sharply higher than USD 82 in July, according to the RBI.
Food-price pressures have also spread, with sharp increases in sugar and onion prices adding to the strain.
Despite the worsening inflation outlook, the RBI raised its economic growth forecast for 2026-27 by 40 basis points to 7.1 percent, following a 7.8 percent expansion in the first quarter.
Activity remained resilient in the second quarter, although momentum moderated. Manufacturing and services continued to expand, while capital-goods production, credit growth and consumer spending remained supportive.
"The Indian economy has been strong, and the economic momentum remains broad-based," Malhotra said, adding that growth was expected to withstand global headwinds.
The RBI nevertheless warned that weaker monsoon rainfall, geopolitical tensions, elevated commodity prices, trade frictions and tighter global financial conditions could weigh on activity.
It also flagged elevated bond yields, trade uncertainty and the risk of a sharp correction in AI-stock valuations as threats to the outlook.
The RBI said monetary policy could not directly address supply shocks but could prevent them from becoming entrenched through inflation expectations and corporate pricing decisions.
"While there is some evidence of elevated inflation expectations and generalisation of inflation, there are limited signs of supply side pressures getting embedded in pricing behaviour," he said.
The length and extent of the rate-hike cycle would depend on actual growth and inflation outcomes, particularly the persistence of underlying inflation and the second-round effects of supply disruptions.
"We shall strive for price and financial stability as both are essential for sustainable growth in the long run," Malhotra said.
The rate increase comes amid abundant financial-system liquidity and faster lending. Average daily surplus liquidity under the RBI’s liquidity adjustment framework reached Rs 5.9 lakh crore since the previous policy meeting.
Bank credit growth accelerated to 18.1 percent year-on-year as of September 15, up from 10.4 percent a year earlier.
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The RBI said strong growth in monetary and credit aggregates posed an additional risk, even though evidence of demand-side inflation pressures remained limited. It would use an appropriate mix of liquidity-management tools to align the weighted average call rate with the repo rate.
The shift to calibrated tightening leaves a pause or another increase as the likely options at upcoming policy meetings.
"We continue to see 25-50 basis point of additional rate hikes going ahead, with further upside if global risks persist," said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.
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