The Monetary Policy Committee (MPC) of the Reserve Bank of India increased the policy rate by 25 basis points – one basis point is one hundredth of a percentage point – taking it to 5.5% on Wednesday. The decision was widely expected and marks the beginning of a new cycle of monetary tightening amidst extremely turbulent conditions in international commodity and capital markets.
The rupee closed at 96.78 against the dollar on Wednesday.
“The West Asia conflict, tariff related uncertainties, elevated bond yields and risks of an unwieldy correction in valuation of AI stocks are keeping global economic sentiments edgy with risk-off sentiments on EMEs (emerging market economies)”, it says attributing some of the ongoing headwinds in equity markets etc. and the consequent pressure on the capital account to such pressures. On the exchange rate question, RBI stuck to its stated position of “ensuring orderly adjustments to the exchange rate that are in sync with the underlying macroeconomic fundamentals and curbing excessive volatility”. A Reuters copy also quoted the Governor as saying that markets were perhaps not realising that “by a number of estimates, including the REER (real effective exchange rate), ”rupee … may be undervalued. “All said, we believe the policy meeting was responsible, as RBI, which is also the risk manager of the economy, has started to work with a scenario in which the external environment can be uneasy for longer. But for now, we don’t see this as a deep rate hiking cycle”, HSBC Chief India Economist Pranjul Bhandari said in a research note issued after the meeting.
Governor Malhotra’s post-MPC statement clearly acknowledges the external economic challenges. Yes, there is risk of another, especially if growth remains resilient despite a strengthening El Niño. For now, we stick to our view that this will be a 50bp rate hiking cycle, of which 25bp was delivered today.
The situation right now is very different from what existed before the 2026-27 Budget was prepared.
“According to the World Bank’s Commodity Prices Outlook, October 2025, global commodity prices are expected to decline by approximately 7 per cent in FY27, primarily driven by subdued crude oil prices amid oversupply”, the 2025-26 Economic Survey had said. To give credit where it is due, the Survey did note that “Geopolitics may come in the way of this prediction”. Next year’s Union Budget will have to factor in for the adverse geopolitical situation.
