Reserve Bank of India raises repo rate to 5.50% in first hike since 2023

Policy tightening and stance shift

The Reserve Bank of India raised its benchmark repo rate by 25 basis points to 5.50% on Wednesday, marking the first rate increase since February 2023. The decision followed a unanimous vote by the six members of the Monetary Policy Committee, making it the first tightening action under Governor Sanjay Malhotra since he assumed leadership in December 2024. Alongside the repo rate adjustment, the central bank set the standing deposit facility rate at 5.25% while maintaining the cash reserve ratio at 3%. The rate-setting panel also replaced its neutral stance with calibrated tightening, indicating that future decisions will be limited to hikes or pauses.

Governor Sanjay Malhotra explained the global environment confronting policymakers during his address.

Driven by escalating energy costs and rising food prices, global inflation is projected to increase sharply, prompting monetary policy tightening by major central banks across the world.

Inflation pressures and economic growth

The policy shift follows persistent price pressures that pushed India's retail inflation to 4.82% in August, remaining above the central bank's 4% target for a third consecutive month. Inflation has widened across nearly half the consumer basket due to higher food costs from El Niño-linked monsoon weakness and elevated energy prices stemming from the conflict in the Middle East. India relies on foreign suppliers for more than 90% of its crude oil requirements. In response to these developments, the central bank raised its annual inflation projection to 5.2% from 5.0% and core inflation expectations to 4.4% from 4.3%.

Domestic economic momentum gave the monetary committee room to tighten policy without jeopardising expansion. Gross domestic product grew by 7.8% in the April to June quarter, exceeding the central bank's earlier 7% projection. For the full financial year, the central bank raised its economic growth forecast by 40 basis points to 7.1%.

Malhotra described external financial pressures in his remarks.

Lingering trade uncertainty, rising bond yields in advanced economies and an appreciating dollar are keeping global financial market sentiment nervous and fragile.

Financial markets and sector movements

Domestic financial markets dropped following the announcement as rate-sensitive sectors led broad declines. The Nifty 50 index fell 0.77% to close at 22,599.1, while the BSE Sensex dropped 0.65% to 72,594.57. Sector indices posted losses across all 16 categories, with automobile stocks falling 1.1%, fast-moving consumer goods declining 0.7%, realty losing 0.5%, and banking equities sliding 0.4%. Benchmark 10-year government bond yields increased by 5 basis points to 7.2655%, whereas the rupee held relatively steady near 96.36 per dollar.

Economist forecasts and future rate path

Financial institutions anticipate further tightening over the coming quarters as price risks persist. Economists at Goldman Sachs project four additional quarter-point increases totalling 1 percentage point by the end of the first half of 2027. Principal economist Sakshi Gupta at HDFC Bank stated that the stance change indicates further moves ahead.

The RBI began its rate-hiking cycle in lockstep with the turn in the interest rates higher by global central banks. The decision to change the stance to calibrated tightening signals that today's rate hike is the beginning of a rate-hiking cycle over the coming months. We expect another 50 to 75 bps rate hikes over the coming months.

ANZ Research and Elara Capital both project at least 50 basis points of additional rate hikes in this cycle, while State Street Investment Management established a base case of 100 basis points of cumulative tightening.