- RBI raised benchmark rates by 25 bps, ending nearly two years of monetary easing
- Repo rate increased to 5.5%, with standing deposit facility rate at 5.25%
- RBI upgraded FY27 GDP growth forecast to 7.1%, citing strong domestic demand
Halting its nearly two-year policy of monetary accommodation, the Reserve Bank of India (RBI) on Wednesday signalled a hawkish turn, as it raised the benchmark lending rates by 25 basis points. The decision, backed unanimously by all members of the Monetary Policy Committe (MPC), led to the first rate hike in over three-and-a-half years.
Consequently, the repo rate has increased to 5.5%, whereas the standing deposit facility rate stands risen to 5.25%. The marginal standing facility rate and the Bank Rate have been revised to 5.75%.
More importantly, the MPC decisively changed its policy stance to "calibrated tightening", with four of six MPC members backing the shift.
Reserve Bank of India Governor Sanjay Malhotra made it clear that rate cuts are entirely off the table in the near term. The central bank's forward guidance indicates that future policy actions will be restricted to either further hikes or an extended pause, firmly contingent on evolving macroeconomic dynamics and the underlying inflation trajectory.
Growth Trajectory Upgraded
The RBI has painted an optimistic picture of the domestic economy, despite flagging the challenges on the external front. The central bank raised its real GDP growth projection for fiscal year 2026-27 to 7.1%, up 40 basis points from earlier estimates.
The economic momentum remains broad-based, with frowth for the second quarter pegged at 7.2%, followed by 6.9% in the third quarter, and 6.8% in the final quarter of the fiscal year.
This upward revision underscores the fundamental strength that the RBI sees in the Indian economy. Domestic activity, Malhotra said, has exhibited severe resilience against global headwinds, driven largely by robust private consumption and a sustained thrust in overall investment activity.
Manufacturing activity continues to hold up well despite underlying cost pressures, he pointed out, while noting that the services sector remains steady due to buoyant domestic and external demand.
ALSO READ: RBI MPC Meeting: Repo Rate Raised By 25 BPS To 5.5%; Rate Cuts 'Off The Table' For Near Term
Global Headwinds
The aggressive policy action comes against the backdrop of a sudden re-escalation of the West Asia conflict in September. The consequent hardening of global crude prices has notably soured global economic sentiments.
Governor Malhotra highlighted that lingering trade uncertainties, rising bond yields in advanced economies, and a strengthening dollar are keeping global financial markets fragile. He also pointed to the uncertainty surrounding the fair valuation of artificial intelligence stocks and the elusive resolution to the West Asia conflict as significant downside risks to the global outlook.
Despite these external shocks, India's external sector remains steady. The country's foreign exchange reserves stand at $734.6 billion, providing an import cover of around 11 months.
Foreign direct investment has seen a sustained improvement, with inflows hitting $13.8 billion between April and August. While foreign portfolio investments witnessed net outflows recently, the broader balance of payments is expected to record a healthy surplus this fiscal year.
Inflation Worries Persist
Inflation remains the primary catalyst for the central bank's tightening measures. Retail inflation spiked to 4.8% in August from 4.5% in July, driven predominantly by higher prices in food and fuel components. This was the third consecutive month when the headline CPI numbers stayed above the RBI's 4% target.
The central bank noted that food price increases have become more broad-based, with notable spikes in essential commodities like sugar and onions. Core inflation has also reversed its benign trend, climbing to 4.2% in August after remaining unchanged for three consecutive months.
For the current financial year, the RBI projects headline retail inflation to average 5.2%. The trajectory expects inflation to print at 4.9% in the second quarter, before accelerating to 6.0% in the third quarter, and subsequently tapering to 5.7% in the fourth quarter. Core inflation for the fiscal year is projected at 4.4%.
The near-term outlook points toward continued supply-side pressures. A deficient southwest monsoon, looming El Niño conditions, and acute volatility in international oil prices are major risk factors. The monetary policy committee warned that price pressures are increasingly visible across a wide range of commodities, signaling early signs of generalized inflation.
Liquidity And External Resilience
On the liquidity front, the banking system has witnessed substantial surplus conditions. System liquidity stood at an average daily surplus of Rs 5.9 lakh crore since the previous policy meeting in August, largely driven by measures taken to attract capital inflows.
The central bank plans to use a dynamic mix of liquidity management tools going forward. The primary objective will be to align the weighted average call rate closely with the revised policy repo rate to ensure seamless monetary transmission.
Credit growth in the banking sector continues to remain robust and broad-based across various segments. System-level parameters related to capital adequacy, asset quality, and the profitability of scheduled commercial banks and non-banking financial companies remain exceptionally sound.
New Financial Market Measures
Alongside the rate decision, the central bank announced key regulatory measures to streamline financial data sharing and market engagement.
The RBI is enabling interoperability among non-banking financial company account aggregators. This move will allow the seamless aggregation of financial information through a single platform, with full implementation slated for the end of December. Depositories regulated by the Securities and Exchange Board of India will also facilitate the inclusion of deposit account data in consolidated account statements.
Additionally, the central bank will constitute a new Technical Consultative Committee for Financial Markets. This body will serve as a dedicated forum for structured engagement with market participants to navigate rapidly evolving financial market dynamics.
ALSO READ: RBI Raises FY27 CPI Inflation Forecast To 5.2% From 5%; Hikes Repo Rate To 5.50%
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