RBI raises repo rate to 5.50 percent and rules out near-term interest rate cuts

The Reserve Bank of India has raised the repo rate by 25 basis points to 5.50 per cent and shifted its policy stance to calibrated tightening. RBI Governor Sanjay Malhotra stated that rate cuts are off the table in the near term, with future actions limited to a rate hike or a pause depending on economic conditions. The central bank's Monetary Policy Committee unanimously voted for the rate increase to combat rising price pressures. Headline CPI inflation is expected to average nearly 5.8 per cent over the next three quarters, while core inflation is projected at 4.4 per cent for the current financial year.

Pressures

The central bank pointed to several factors driving price pressures, including a weak southwest monsoon, strong El Niño conditions, and high volatility in international oil prices. Global risks such as tightening financial conditions, uncertainty around artificial intelligence stock valuations, and the West Asia conflict also threaten the economic outlook. Governor Malhotra noted that while demand-side pressures remain limited, risks exist due to strong growth in monetary and credit aggregates.

Context

Central banks typically raise interest rates when inflation rises above their target range, making borrowing costlier for consumers and businesses to slow down spending. The Reserve Bank of India uses tools like the repo rate to manage money supply and keep prices stable across the country.