The Reserve Bank of India (RBI) raised its benchmark repo rate by 25 basis points to 5.5% on Wednesday, marking its first rate hike in nearly four years as inflationary pressures build despite resilient economic growth.
The MPC’s three-day meeting, being held from October 5 to 7, comes after it kept the repo rate unchanged at 5.25 per cent in August and retained a neutral stance, citing the need for greater clarity on the inflation outlook and evolving growth-inflation dynamics. Earlier reporting noted: Since the RBI’s last policy meeting in August, inflation has accelerated further, oil prices have surged back above $100 a barrel, the US Federal Reserve has begun tightening, and the rupee has weakened. Earlier reporting noted: With inflation nearing 5 per cent and expected to climb closer to the upper end of the RBI’s 2 per cent-6 per cent tolerance band in the December quarter, economists see more tightening beyond Wednesday.
Foreign exchange reserves posted a record weekly decline as the RBI intervened to prop up the currency. A resilient economy gives policymakers scope to lift borrowing costs without significantly denting growth.
The six-member Monetary Policy Committee (MPC) unanimously voted to raise the policy rate and shifted its stance to “calibrated tightening” from “neutral”, signalling a greater focus on containing inflation. Earlier reporting noted: “A shift in stance could indicate a deeper tightening cycle, which appears unwarranted given that inflation remains primarily supply-side driven and growth faces two-sided risks,” Sen Gupta added.
What is happening?
The last repo rate hike was in February 2023, when the RBI raised the rate by 25 basis points to 6.50 per cent. The central bank kept the rate unchanged through 2023-24 before beginning its rate-cut cycle in 2025. The government has mandated the RBI to keep consumer price index (CPI)-based retail inflation at 4 per cent, with a tolerance band of 2 percentage points on either side. Retail inflation accelerated to 4.82 per cent in August from 4.45 per cent in July.
Most experts said a rate increase was imminent, while some felt the central bank may hold off on a hike in the upcoming review.
