India's Monetary Policy Committee voted unanimously on Wednesday, 7 October, to raise the policy repo rate, the overnight rate it charges banks, by 25 basis points to 5.50%. [E1][E7][E9][E4] It is the first increase since February 2023, when the Reserve Bank of India also raised rates by 25 basis points. [E4][E8] The rate banks earn on funds parked at the RBI is now 5.25%, and the emergency borrowing rate and the Bank Rate are 5.75%. [E1] The committee also changed its stance to calibrated tightening. [E1]
Announcing the decision, Governor Sanjay Malhotra said high-frequency indicators show economic activity holding momentum in the second quarter, with some moderation from the first. [E5] "The policy action ahead can only be a rate hike or pause, depending on the evolving conditions," he said, the Indian Express reported. [E5] The RBI said that given current conditions, rate cuts are off the table in the near term, and that the duration and extent of the hike cycle would depend on growth and inflation, especially underlying inflation, how far price pressures broaden, second-round effects of the supply shock, and demand. [E2]
Real GDP growth for 2026-27 is projected at 7.1%, with 7.2% in the second quarter, 6.9% in the third and 6.8% in the fourth, an upward revision of 40 basis points that the RBI said underscores the strength of activity despite global headwinds from geopolitical tensions, elevated commodity prices, trade frictions and tighter financial conditions. [E3] The Indian Express reported the hike against rising inflationary pressures, elevated crude-oil prices and a challenging global interest-rate environment. [E4] Retail inflation rose to 4.82% in August, above the 4% medium-term target for a third consecutive month, although it remains inside the 2-6% tolerance band. [E5]
The decision comes against rising food and energy prices, weather-related disruptions and higher crude oil prices. [E6] Maharashtra has declared drought in about 265 of its 358 sub-districts, and the possibility of drought has been flagged in Karnataka, Telangana, Andhra Pradesh and Rajasthan. [E6] Reservoir levels across India are about 20% below last year's, raising concerns about farm output and the winter crop, and the possibility of El Niño conditions extending into 2027 remains a key risk to the inflation outlook. [E6]
Ahead of the announcement, 20 of 21 economists and bank executives that the Economic Times polled expected a hike, a reversal of their expectations before the 3-5 August meeting; one expected the rate to stay unchanged, as it has since a 25-basis-point cut to 5.25% in December last year. [E10] Bank of Baroda chief economist Madan Sabnavis took the other side, asking why the RBI would act differently when macroeconomic conditions and risks looked as they had in August, and warning that a hike now could dent festival spending while deposit-rate transmission stayed sticky; he said deferring a hike would cool bond yields. [E11]
There is a 62% probability that the Reserve Bank of India leaves the repo at 5.50% with no cut at the next scheduled Monetary Policy Committee decision, on December 2 to 4, 2026. [E12] The base is a unanimous first hike since February 2023 and the Governor's instruction that near-term policy is hike or pause. The working assumption is that "near term" covers that December meeting, that a cut would need a surprise large enough to override that guidance, and that calibrated tightening does not require a hike at every following meeting. A further rise in inflation or crude would lift the chance of another hike; a sharp cooling in prices or a break in growth would lift the chance of a cut.