RBI Raises Repo Rate to 5.50%, Shifts Stance to Calibrated Tightening

Synopsis

The Reserve Bank of India announced calibrated tightening stance and hiked its policy repo rate by 25 basis points to 5.50% on Wednesday for the first time in the year since February 2023. The rate decision was unanimous and the stance change passed 4–2. The monetary authority has increased its FY27 inflation forecast to 5.2% and growth to 7.1% due to wider pressure and risks in the world.

The Reserve Bank of India (RBI) hiked its policy rate repo rate by 25 basis points (bps) to 5.5 per cent on Wednesday for the first time since February 2023 and moved away from its dovish stance to calibrated tightening.

The Monetary Policy Committee, which consists of six members, unanimously approved the hike, but the decision to change the stance was approved 4–2. The Standing Deposit Facility rate is now at 5.25% while the Marginal Standing Facility and Bank Rate rates are 5.75%. The economists surveyed by Reuters had predicted a 25-basis-point rise.

The governor of the Reserve Bank of India, Sanjay Malhotra, said earlier this month that the central bank was seeking to revise its policy on foreign exchange trading.

What is the inflation differential?

CPI inflation hit 4.8% in August, up from 4.5% in July, mainly due to higher food and fuel prices, while core inflation increased to 4.2% from 3.9%. The price hikes in food prices had become more widespread, Mr Malhotra said, noting that sugar and onions were among the commodities under the impact. Wider price pressures are now seen in about 37% of the CPI items, as the proportion experiencing inflation above 4% has increased. The inflation forecast for FY27 had been increased to 5.2% in the Business Standard.

Calibrated tightening: Policy cues communicated by the central bank that rate cuts are less likely, and that any further move to be considered, whether it is a rate hike or a pause, will depend on the data.

Growth and risks

After real GDP growth of 7.8% in the first quarter of FY27, the RBI's forecast for FY27 GDP growth was revised to 7.1%. It pointed out a weak southwest monsoon, high El Niño levels as threats to the rural demand, and the uncertainty on the valuations of AI stocks and the unresolved conflict in West Asia.

The duration and severity of a tightening would depend on the underlying inflation, the second-round impact of supply shocks and demand, Mr Malhotra said.

What analysts expect

HSBC said the move to calibrated tightening is aimed at making it more credible but not deepening a cycle of hikes and predicts another 25-basis-point increase in December. Business Standard reported that government bond yields spiked up to nearly 7.27% following the announcement.

Why it matters

If the repo rate is increased, one would expect that lending rates on floating-rate loans would also rise, and any change of RBI's policy stance would impact not only the expectations of borrowers but also banks and investors. The move coincides with the rupee hitting a new low as well.