RBI increases repo rate to 5.50 percent after nearly two years

The Reserve Bank of India has raised its key repo rate by 25 basis points to 5.50 per cent. This change is the first rate hike since February 2023 and signals a shift to tighter monetary policy. The Monetary Policy Committee also altered its policy stance to calibrated tightening from neutral. RBI Governor Sanjay Malhotra stated that future actions will be either a rate hike or pause based on conditions.

Economic Forecasts

The policy panel increased its economic growth projection for financial year 2027 to 7.1 per cent from 6.7 per cent. At the same time, the inflation forecast was raised to 5.2 per cent from 5 per cent previously. Retail inflation reached 4.82 per cent in August, staying above the 4 per cent medium-term target for the third consecutive month. Officials pointed to risks from weather disruptions, higher crude oil prices above 100 dollars a barrel, and potential El Nino conditions extending into 2027.

Context

Central banks typically raise interest rates to cool down rising prices across the economy when inflation stays above targeted levels for extended periods. Higher repo rates make borrowing costlier for commercial banks, which generally leads to increased interest rates on home, personal, and vehicle loans for regular consumers.