The Reserve Bank of India (RBI) recently announced a repo rate increase to 5.50% on October 7, 2026, marking its first hike since February 2023. Simultaneously, the central bank injected a substantial ₹2.5 lakh crore into the banking system, a decision that has sparked questions about the direction of its monetary policy.
Understanding the RBI's Dual Approach
While higher interest rates typically lead to costlier loans, the additional liquidity aims to ensure banks have sufficient funds for continued lending. Joydip Gupta, Head APAC at Scienaptic AI and a leading lending expert, explained to Business Today that these two measures serve distinct purposes and should not be seen as conflicting signals.
"They act on two different things. The repo rate sets the cost of funds. Liquidity ensures enough cash is available in the short term," Gupta stated.
The RBI's Monetary Policy Committee (MPC) also shifted its policy stance to calibrated tightening, indicating a measured approach to monetary management.
Why Liquidity Injection Despite Rate Hike?
Gupta elaborated that a central bank can strategically increase borrowing costs while ensuring adequate liquidity to prevent any immediate funding shortages, especially during periods like the holiday season. However, he cautioned that this liquidity support is temporary and not a permanent increase in banks' available funds.
For lenders, this implies that while funding costs may climb, the short-term availability of money remains relatively comfortable.
Impact on Loan Availability and Borrowers
Contrary to concerns, Gupta believes that higher interest rates will not necessarily lead to a scarcity of credit. Instead, banks and other financial institutions are likely to become more discerning in their lending practices.
"Credit does not get scarcer. It gets distributed more precisely, and the quality of that precision is an underwriting question," he explained.
As interest rates rise, lenders may implement stricter eligibility criteria, enhance documentation checks, and prioritize borrowers with established repayment histories. This shift could mean that first-time borrowers or individuals with limited credit histories might face increased scrutiny.
Existing vs. New Borrowers
- Floating-Rate Loans: Borrowers with floating-rate loans will typically feel the impact first, with changes potentially appearing within approximately three months, depending on their loan reset schedules.
- New Borrowers: Individuals applying for new loans will likely encounter revised rates immediately upon sanction.
- Fixed-Rate & NBFC Loans: Fixed-rate borrowers and clients of non-banking financial companies (NBFCs) may experience the effects later, as higher funding costs gradually trickle down.
Gupta noted that a single 25-basis-point increase might have a modest monthly impact. However, the overall direction of future interest rate decisions will be more critical for borrowers. The RBI's next MPC meeting, scheduled for December 2–4, will be closely observed for indications of whether October's increase signals the start of a prolonged tightening cycle.