RBI Hikes Repo Rate: The Reserve Bank of India (RBI) on Wednesday raised the repo rate by 25 basis points to 5.50% from 5.25%, as the Monetary Policy Committee (MPC) flagged rising inflation risks from food prices, elevated commodity prices and heightened global uncertainty. The MPC also shifted its stance to “calibrated tightening”, with four of the six members voting in favour of the stance decision.
The Standing Deposit Facility (SDF) rate stands at 5.25%, while the Marginal Standing Facility (MSF) rate and Bank Rate were raised to 5.75%. The MPC's decision to hike the repo rate was unanimous.
More importantly, the RBI raised its inflation projections across the forecast horizon, signalling that price pressures are expected to remain elevated for longer. FY27 CPI inflation is now seen at 5.2%, compared with 5% projected earlier, while the Q2, Q3 and Q4 forecasts were also revised higher.
RBI Raises Inflation Forecast Across FY27
The RBI now expects Q2 FY27 CPI inflation at 4.9%, up from 4.7% earlier. The projection for Q3 has been raised to 6% from 5.9%, while Q4 inflation is seen at 5.7% compared with 5.5% earlier.
For the first quarter of FY28, the RBI now expects CPI inflation at 5.6%, compared with 5.3% projected earlier.
The central bank has also raised its FY27 core inflation forecast to 4.4% from 4.3% earlier.
The upward revisions underline the RBI's assessment that inflationary pressures could remain persistent, particularly as food prices, crude oil and other commodity prices face renewed risks amid a volatile global environment.
RBI CPI Inflation Projections
- FY27 CPI inflation: 5.2% vs 5% earlier
- Q2 FY27 CPI inflation: 4.9% vs 4.7% earlier
- Q3 FY27 CPI inflation: 6% vs 5.9% earlier
- Q4 FY27 CPI inflation: 5.7% vs 5.5% earlier
- Q1 FY28 CPI inflation: 5.6% vs 5.3% earlier
- FY27 core inflation: 4.4% vs 4.3% earlier
Inflation Outlook: RBI Sees Rising Price Pressures
RBI Governor said the inflation outlook is not as benign as it was last year, with recent data pointing towards a broadening of price pressures. While there is limited evidence of demand-side inflationary pressure, supply-side risks have become more prominent.
India's CPI inflation rose to 4.8% in August from 4.5% in July, largely driven by food and fuel component inflation. The increase in food prices has also become more broad-based, with commodities such as sugar and onion contributing to the pressure.
The RBI also flagged an unfavourable base effect as a factor that could influence inflation readings going ahead.
Core Inflation Also Edges Higher
Core inflation, which excludes food and fuel, increased to 4.2% in August, after remaining around 3.9% for the previous three months.
The RBI Governor said there are early signs of inflation becoming more generalised, although the central bank sees limited evidence of demand-side pressure at present.
The MPC noted that supply-side factors remain the key source of inflation risk, with commodity prices, crude oil price volatility, weather conditions and global developments likely to influence the inflation trajectory.
Global Inflation Risks Rise
The RBI Governor said the sudden escalation of the West Asian conflict in September and volatility in global crude oil prices have heightened uncertainty in the global economic outlook.
Global growth is holding up but is expected to decelerate this year, while rising food prices and global inflation could lead major central banks towards tighter monetary policy.
The RBI also flagged risks from further tightening of global financial conditions, uncertainty surrounding AI stocks and continuing geopolitical tensions, which could create significant downside risks to the global outlook.
Elevated commodity prices and tighter global monetary conditions could consequently have a bearing on India's inflation trajectory.
Rate Cuts Off The Table In Near Term
The RBI Governor said rate cuts are off the table in the near term, with the MPC viewing a recalibration of the policy rate as imperative given the changing macroeconomic conditions.
The combination of a 25 bps repo rate hike, an upward revision to inflation projections and a shift towards calibrated tightening indicates that the RBI is prioritising inflation risks even as domestic growth remains resilient.
Growth Remains Resilient Despite Global Uncertainty
On growth, the RBI said the domestic economy remains resilient, with real GDP growth coming in at 7.8% in Q1.
Manufacturing activity has held up despite cost pressures, while services sector activity remains steady and broad-based. Manufacturing and services PMIs remained in the expansionary zone, although the pace of expansion slowed.
Private consumption remained strong, supported by discretionary spending. However, some weakness was observed in areas such as non-durable goods and air passenger traffic.
Merchandise exports registered higher double-digit growth, while services growth also accelerated.
FY27 GDP Growth Forecast Raised To 7.1%
The RBI raised its FY27 GDP growth forecast to 7.1% from 6.7% earlier, reflecting the resilience of domestic economic activity.
Looking ahead, the RBI said global uncertainty and supply-chain disruptions could have some bearing on domestic economic activity. Strong El Niño conditions and the southwest monsoon could also affect upcoming rabi crops and rural demand.
At the same time, the government's focus on infrastructure spending and a revival in capital expenditure, along with buoyant services exports and recent bilateral agreements, is expected to support economic activity.
RBI Governor On Inflation
The RBI Governor said the inflation outlook is not as benign as last year, while acknowledging that there is limited evidence of demand-side pressure.
He said global inflation is expected to increase sharply, with the escalation of geopolitical conflicts contributing to heightened market volatility.
Against this backdrop, the RBI's latest policy action signals a greater focus on containing emerging inflationary risks, even as the domestic economy continues to show resilience.
The 25 bps repo rate hike to 5.50%, combined with the upward revision to inflation projections and the shift to a calibrated tightening stance, puts inflation and the evolving global risk environment firmly at the centre of the RBI's monetary policy outlook.
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