RBI hikes repo rate to 5.5% and signals further tightening amid rising inflation

The RBI’s Monetary Policy Committee lifted the repo rate by 25 basis points on Wednesday, taking it to 5.5% – the first hike in over three and a half years. The committee also changed its stance from “neutral” to “calibrated tightening”, signalling that cuts are off the table and only further hikes or a pause are possible. It raised its inflation outlook for the current fiscal year to 5.2% from 5% and expects an average peak of 6% in the October‑December quarter, while noting rising inflation expectations and a spread of price pressures. State Bank of India’s Group Chief Economic Adviser Soumya Kanti Ghosh argued in a report that a “jumbo” 50‑basis‑point increase in December, or even earlier, is needed to reach a 6% repo rate, citing volatile global conditions. SBI’s own forecast sees headline retail inflation peaking at 6.8% in November, with data due a week after the next policy meeting. A snap poll of 15 economists showed a consensus for two more 25‑basis‑point hikes over the next six months, totaling 50 bps. Many analysts, including HSBC’s Pranjul Bhandari, expect a single 25‑basis‑point rise to 5.75% in December, noting that the RBI’s priority is taming inflation rather than supporting the rupee. The rupee closed at 96.78 per dollar, after touching 96.86, close to its all‑time low of 96.96. Governor Sanjay Malhotra described short‑term market moves as “irrational” and suggested the rupee may be undervalued. Some commentators, such as Bandhan Mutual Fund CIO Suyash Choudhary, warned that higher global real yields and commodity pressures leave the RBI with limited room, and projected total hikes of 100‑125 bps including today’s move.

Context

The repo rate is the key tool the RBI uses to curb inflation; higher rates make borrowing costlier, slowing demand and easing price pressures. Global factors such as rising US yields and commodity price spikes can push imported inflation higher, forcing the RBI to act more aggressively.