The Monetary Policy Committee of the Reserve Bank of India raised the repo rate by 25 basis points to 5.50% after its meeting from October 5 to 7, marking the first rate hike since February 2023. All six members voted unanimously in favor of the increase.

The policy stance shifted from neutral to calibrated tightening, with the vote tally being 4 to 2. Governor Sanjay Malhotra stated that recent rate cuts are no longer an option, and the next steps could only be a rate hike or a pause. The standing deposit facility rate was adjusted to 5.25%, while the marginal standing facility rate and bank rate were set to 5.75%.

The last rate hike occurred in February 2023, when it was raised by 25 basis points to 6.50%. Malhotra, who took office as governor in December 2024, implemented this increase as his first adjustment to the policy rate. A majority of economists surveyed by Bloomberg had anticipated this rate hike.

Factors triggering this decision include oil prices, monsoon conditions, and exchange rates. The consumer price index rose to 4.8% in August, the highest in 22 months, exceeding the 4% target. The governor indicated that the average overall inflation for the next three quarters is expected to be close to 5.8%, with a core inflation forecast of 4.4% for the current fiscal year. The conflict in West Asia has pushed oil prices above $100 per barrel, while weak monsoon conditions and a depreciating rupee have contributed to imported inflation.

Growth forecasts remain unchanged. The GDP growth rate for the fiscal year 2026-2027 has been revised up from 6.7% to 7.1%, and the inflation forecast for that fiscal year has been adjusted from 5.0% to 5.2%. The governor stated that the duration of the rate hike cycle depends on underlying inflation, second-round effects of supply shocks, and demand. Government bond yields rose following the announcement.

Buyers include foreign investors chasing the rupee asset spread and domestic funds allocating to short-term debt, while sellers are long-term government bonds and companies reliant on floating-rate loans. The event is driven by oil prices and exchange rates, with funds shifting from growth trades to inflation protection trades. Beneficiaries include banks' net interest margins and short-term deposits, while housing loan borrowers, highly leveraged companies, and long-term bondholders face pressure.

Source: Public Information