RBI Raises Repo Rate to 5.50% as Inflation Risks Strengthen

The Reserve Bank of India (RBI) has raised its policy repo rate by 25 basis points to 5.50%, marking a shift toward tighter monetary policy as inflationary pressures, elevated global yields and strong domestic economic activity weigh on the outlook. The decision was taken unanimously by the Monetary Policy Committee (MPC), which had kept the repo rate unchanged at 5.25% in its August meeting while maintaining a neutral stance. Following the latest increase, the Standing Deposit Facility (SDF) rate stands at 5.25%, while the Marginal Standing Facility (MSF) rate and Bank Rate have been set at 5.75%. The MPC also adopted a calibrated tightening stance through a majority vote. RBI Governor Sanjay Malhotra said the decision followed an assessment of evolving macroeconomic and financial conditions and the outlook. Inflation has emerged as a key factor behind the policy shift. India’s consumer price inflation stood at 4.82% in August, while economists and research reports have projected inflation to rise above 5% during FY27. Inflation is expected to peak at around 5.9% in the third quarter, with weak monsoon conditions and crude oil prices near USD 100 per barrel adding to the risks. Global financial conditions have also become less accommodative, with the US Federal Reserve raising its policy rate by 25 basis points in September and US 10-year Treasury yields remaining elevated at around 5.3%. Meanwhile, the Indian rupee was trading at 96.36 per US dollar at the time of reporting. Liquidity conditions were another consideration for the central bank. The RBI’s special forex swap facility had mobilized USD 132.98 billion through FCNR(B) deposits as of August 31, contributing significant liquidity to the banking system and increasing the need for calibrated absorption. Despite the inflation concerns, India’s domestic economy has remained resilient. GDP growth reached 7.8% in Q1 FY27, while high-frequency indicators pointed to continued momentum in domestic demand, manufacturing and services. Economists had previously estimated that cumulative monetary tightening of up to 75 basis points could be possible, potentially taking the repo rate toward 6% by the end of FY27 depending on inflation, crude oil prices and global financial conditions.