Mumbai – The Reserve Bank of India (RBI) announced on October 7 a 25-basis point increase in its benchmark repo rate, pushing it to 5.50%. This marks the first such hike in nearly four years, a decision driven by persistent inflation concerns stemming from elevated crude oil prices and a deficient southwest monsoon.
Why the RBI Hiked the Repo Rate
RBI Governor Sanjay Malhotra confirmed that the Monetary Policy Committee (MPC) opted for a “calibrated tightening” stance, ruling out any immediate rate cuts. The decision aligns with similar actions by other major central banks, including the Bank of Japan, the US Federal Reserve, and the European Central Bank.
Inflation has been on an upward trend, with the Consumer Price Index (CPI) inflation reaching 4.82% in August, up from 4.45% in July. The RBI has revised its CPI inflation forecast for the financial year ending March 2026 to 5.2%, an increase from its earlier 5% projection. Inflation is now expected to remain above the targeted 4% in the second, third, and fourth quarters of the fiscal year, with projections of 6% for the October-December quarter.
Economists Weigh In on Future Hikes
The consensus among economists is that more rate hikes are likely, though the extent of the tightening cycle varies in their predictions:
- Rajani Sinha, Chief Economist at CareEdge Ratings: While domestic economic momentum is expected to remain healthy, inflation is a significant concern, potentially touching the upper tolerance limit of 6%. Sinha anticipates a “shallow” hike cycle, with scope for another 25-50 bps increase.
- Tanvee Gupta Jain, UBS Economist: Jain forecasts a cumulative rate hike of 50-75 bps, including another 25 bps hike in December. She highlights elevated inflation risks due to uncertainties surrounding crop yields and reservoir levels, predicting headline inflation to stay above 5.5% for three consecutive quarters.
- ICRA: The credit ratings agency expects just one more 25 bps hike in December, with no further tightening unless major inflation surprises emerge. However, ICRA also sees significant risks to the RBI’s growth outlook, citing potential impacts of a deficient monsoon on consumption demand.
- Pranjul Bhandari, HSBC's Chief India Economist: Bhandari does not foresee a deep rate hike cycle, noting that the RBI has historically prioritized growth during El Niño-induced price spikes. She maintains a view of a 50 bps hiking cycle in total, with 25 bps already delivered.
- Indranil Pan, Chief Economist at Yes Bank: Pan believes more substantial hikes may be necessary, citing the change in stance to calibrated tightening. He considers a December hike of 25 bps a certainty and suggests a total of 100 bps may be required given the RBI's inflation projections.
Despite the inflation pressures, the RBI has simultaneously raised its GDP growth forecast for the full year 2026-27 to 7.1%, up from an earlier projection of 6.7%.