In a significant monetary policy shift, the Reserve Bank of India (RBI) announced on Wednesday a 25-basis-point increase in its benchmark repo rate, pushing it to 5.5%. This marks the first such hike since February 2023, ending a period of stability where the rate had been held steady at 5.25% for four consecutive policy reviews.
Unanimous Decision by the Monetary Policy Committee
RBI Governor Sanjay Malhotra confirmed that the Monetary Policy Committee (MPC) voted unanimously to implement the rate hike. This decision came after a comprehensive assessment of current macroeconomic and financial conditions, as well as the future outlook.
Consequently, the Standing Deposit Facility (SDF) rate has been adjusted to 5.25%, and both the Marginal Standing Facility (MSF) rate and the Bank Rate now stand at 5.75%.
Context of the Rate Adjustment
The latest RBI repo rate hike follows a period in 2025 when the central bank had delivered a cumulative 125-basis-point rate cut. Prior to that, the last repo rate increase occurred in February 2023, when the rate was raised by 25 bps to 6.50%. The rate remained unchanged throughout 2023-24 before the initiation of the rate cut cycle in 2025.
Market Expectations and Outlook
The decision aligns with expectations from many financial experts. A Reuters poll indicated that 35 out of 61 economists anticipated a 25 bps hike, while 26 predicted no change. Similarly, a majority of participants in a PTI poll also expected a 25 bps repo rate increase alongside a hawkish stance from the MPC.
A currency trader from a private-sector bank noted that a 25 bps hike was likely to result in a more muted market reaction compared to a larger increase or no change, which could have put immediate pressure on the rupee. Governor Malhotra also indicated that rate cuts are “off the table” in the near term, signaling a continued focus on economic stability and inflation management.