RBI Raises Repo Rate to 5.50% as Inflation Risks Mount

The Reserve Bank of India (RBI) on Wednesday raised its policy repo rate by 25 basis points to 5.50 per cent, marking the start of a rate-hike cycle as rising inflation risks, elevated global yields and resilient domestic growth strengthened the case for tighter monetary policy.

The decision by the Monetary Policy Committee (MPC) marks a shift from its August policy, when it kept the repo rate unchanged at 5.25 per cent and maintained a neutral stance while seeking greater clarity on the inflation outlook and the balance between growth and inflation.

In his statement, RBI Governor Sanjay Malhotra said, “After a detailed assessment of the evolving macroeconomic and financial conditions, developments and the outlook, the MPC voted unanimously to increase the policy repo rate by 25 basis points.”

Following the repo rate hike, the standing deposit facility (SDF) rate stands at 5.25 per cent, while the marginal standing facility (MSF) rate and Bank Rate have been set at 5.75 per cent. The MPC also shifted its stance to calibrated tightening with a majority vote.

The decision comes amid increasing price pressures. India’s CPI inflation stood at 4.82 per cent in August, while economists and research reports have projected inflation to rise above 5 per cent during FY27. Inflation is expected to peak at around 5.9 per cent in the third quarter, with deficient monsoon conditions and crude oil prices near USD 100 a barrel adding to the risks.

Global financial conditions have also become less supportive. The US Federal Reserve raised its policy rate by 25 basis points in September, while US 10-year Treasury yields have remained elevated at around 5.3 per cent. The rupee was trading at 96.36 per US dollar at the time of filing.

Liquidity was another key consideration for the RBI. The central bank’s special forex swap facility mobilised USD 132.98 billion through FCNR(B) deposits as of August 31, adding significant liquidity to the banking system and increasing the need for calibrated absorption.

The RBI’s decision also comes against the backdrop of resilient domestic economic activity. India’s economy grew 7.8 per cent in Q1 FY27, while high-frequency indicators pointed to continued strength in domestic demand, manufacturing and services.

The latest rate hike is expected to shape the direction of monetary policy in the coming months. Economists had earlier projected scope for cumulative tightening of up to 75 basis points, with the repo rate potentially reaching around 6 per cent by the end of FY27, depending on inflation, oil prices and global financial conditions.