The Reserve Bank of India's monetary policy committee has finally pulled the trigger on the rising inflation and decided to hike its repo rate by 25 basis points on Wednesday, October 7, 2026 to 5.5%.
The raise in the key lending rate comes after over three years and 43 months, when the banker's bank had increased repo rate by 250 bps or 2.5% cumulatively over 6 sessions between May 2022 and Feb 2023.
In his address, RBI Governor Sanjay Malhotra made it clear that any rate cuts were "off the table" in the near future, hinting at a hike cycle that mirrors that of 2022-23.
"The 25 bps hike was expected, but the shift to calibrated tightening is the real signal. The RBI has effectively started a hiking cycle it is reluctant to name, and we see a further 25 bps at each of the next two meetings," highlighted Purvi Mundhra, Economist and Deputy Vice President at Choice Institutional Equities
There is a high probability that the repo rate would raised in the December 2026, and February 2027 MPC meeting, echoed Gaurav Kapur, Chief Economist, IndusInd Bank.
The inception of a hike cycle is often prompted by similar triggers and context, although, some differences should be noted between these two periods.
Tale Of Two Cycles
On May 4, 2022, with the Shaktikanta Das-led RBI MPC when it decided to raise repo rate under the liquidity adjustment facility (LAF) by 40 basis points to 4.40% in a surprise move during an off-cycle meeting.
The decision was prompted by a stubborn inflation which refused to ease, the rejuvenation in the Indian economy in the aftermath of the COVID-19 pandemic and resumption of operations, and a series of aggressive rate cuts (approx. 250 bps since 2019).
The sharp slashes were executed to keep the economy afloat during the global pandemic and brought down the repo rate to 4% by March 2022 from 6.5% in 2019, substantially injecting liquidity in the hands of the people.
By May 2022, the conflict between Russia and Ukraine had heated up into a full fledged war, pushing energy prices higher and hindering global supply chains after many countries imposed sanctions on Russia.
At the time of the rate revision, brent crude futures traded between $100/barrel and $113/barrel levels. On the day of the rate hike the oil benchmark traded around $107 per barrel, not a far cry from today's $101 per barrel.
However, the present rate revision was largely anticipated, as opposed to the shocker delivered back in 2022. Economists had expected a repo rate hike of 25 basis points in June after a 6.95% inflation print, but the emergency RBI meeting caught the markets off-guard.
While Indian equities plunged over 2% during the 2022 off-cycle shock—with the Nifty 50 diving 391.50 points and the Sensex crashing 1,306.96 points—Wednesday's market reaction was notably muted. Benchmarks traded lower overall but clocked a modest recovery from their intraday lows.
Another key distinction is the RBI's use of the Cash Reserve Ratio. In May 2022, the Shaktikanta Das-led MPC complemented the rate hike with a 50-bps CRR increase to 4.5%, draining over â‚ą80,000 crore from the banking system. In contrast, Governor Malhotra left the CRR untouched on Wednesday, though he signaled that liquidity could be tightened in the future.
Growth Forecasts: FY23 Vs FY27
The central bank revised its FY27 real GDP growth estimate upward to 7.1%, up from the 6.7% projected earlier. Quarterly projections also saw upward tweaks, with Q2 and Q3 growth now pegged at 7.2% and 6.9%, respectively.
However, analysts remain cautious. "The GDP upgrade is arithmetic rather than conviction; it simply absorbs a strong Q1, and the back-half numbers look vulnerable," Mundhra noted. "With growth set to slow as inflation climbs, the economy is edging toward a stagflationary mix."
Different War, Same Inflation Problem
Signaling that price pressures will remain elevated for longer, the RBI shifted its policy stance to "calibrated tightening." The central bank raised its FY27 CPI inflation forecast to 5.2% from 5%, though some economists expect inflation to breach this target and touch 5.9%.
In 2022, the RBI faced a similar dilemma—lowering its FY23 GDP projection to 7.2% while grappling with an elevated 6.7% full-year inflation estimate.
"The RBI describes the global backdrop as severe but models it as survivable," Mundhra underscored. "India's resilience is real, but it is being asked to do more work than it can comfortably handle. We think it is operating on borrowed time."
Food Inflation Threat
Global supply chain disruptions aren't the only risk factors. Governor Malhotra flagged that a weak southwest monsoon, coupled with strong El Niño conditions, could threaten the upcoming rabi sowing season and dampen rural demand. If crop production weakens, food inflation is expected to face renewed upward pressure.
This stands in stark contrast to the climate conditions surrounding the May 2022 rate hike, when a favorable southwest monsoon forecast had brightened prospects for Kharif crop production and offered a natural buffer against food price volatility.
Worldwide Hawk's-Eye View
India's rate hike is not an isolated event. Across the globe, central banks are executing or signaling a pivot toward tighter monetary policy, reflecting a hawkish shift led by the US Federal Reserve.
Earlier in September, the Fed raised its benchmark rate by 25 basis points to a target range of 3.75%-4.00%—its first increase since 2023. Other major economies have adopted a similar trajectory. On September 18, the Bank of Japan hiked its benchmark rate by 25 basis points to 1.25%, reaching a 31-year high. Meanwhile, the Bank of England held its rate at 3.75%, but signaled a strong bias toward near-term hikes to combat surging energy costs.
This synchronised tightening marks a swift end to global easing. Central banks that previously maintained a dovish stance are turning hawkish in response to the ongoing Iran war, which has sent energy prices soaring and fractured global supply chains. Coupled with adverse climate conditions weighing on economic output, these compounding crises are forcing global policymakers to prioritize inflation control over growth.
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