RBI policy highlights: Repo rate rises 25 bps as inflation risks broaden

The Reserve Bank of India (RBI) on Wednesday raised the repo rate by 25 basis points to 5.5 per cent, its first rate hike since February 2023, and shifted its monetary policy stance to calibrated tightening as inflation pressures broaden.

The six-member Monetary Policy Committee (MPC) voted unanimously for the rate increase, while four members backed the change in stance. Here are the key takeaways from Governor Sanjay Malhotra’s policy statement:

1. Repo rate raised to 5.5%

The MPC raised the repo rate by 25 basis points to 5.5 per cent. The Standing Deposit Facility rate now stands at 5.25 per cent, while the Marginal Standing Facility rate and Bank Rate are at 5.75 per cent.

2. Policy stance shifts to calibrated tightening

The MPC voted 4-2 to change its stance to calibrated tightening, signalling that near-term interest rate cuts are off the table and future actions will lean toward measured, gradual rate hikes or a pause depending on incoming data.

Governor Malhotra added the duration and extent of any rate hike cycle would depend on underlying inflation, the broadening of price pressures, second-round effects of supply shocks and demand conditions.

3. Inflation outlook has worsened

The RBI said inflation and its outlook are no longer as benign as they were last year. Headline CPI inflation is expected to average nearly 5.8 per cent over the next three quarters, including the current quarter. Core inflation is projected at 4.4 per cent for the current financial year.

4. Food prices are becoming a bigger concern

CPI inflation rose to 4.8 per cent in August from 4.5 per cent in July, mainly because of higher food and fuel inflation. Governor Malhotra said food price increases had become more broad-based, with notable increases in items such as sugar and onions.

Core inflation rose to 4.2 per cent in August, after staying at 3.9 per cent for three consecutive months. The weighted share of CPI items recording inflation above 4 per cent also increased to around 37 per cent in August, indicating a wider spread of price pressures.

5. Growth remains strong

The RBI retained a relatively firm growth outlook despite global uncertainties. Real GDP grew 7.8 per cent in the first quarter, supported by resilient private consumption and strong investment activity. Investment grew by nearly 12 per cent, Malhotra said.

High-frequency indicators suggest that economic activity has remained strong in the second quarter, although momentum has moderated from the previous quarter.

Manufacturing and services activity remain in expansion territory, while private consumption and fixed investment continue to support growth.

6. FY27 GDP growth projected at 7.1%

The RBI projected real GDP growth at 7.1 per cent for the year.

Quarterly projections are:

– Q2 FY27: 7.2 per cent

– Q3: 6.9 per cent

– Q4: 6.8 per cent

– Q1 FY28: 7.1 per cent

The risks to the growth outlook are assessed to be evenly balanced.

7. Global risks remain significant

The RBI said global growth is expected to slow from last year, while higher energy and food prices could push up global inflation. Higher bond yields in advanced economies, an appreciating dollar and tighter global financial conditions are keeping financial markets nervous, Malhotra said.

The RBI also flagged uncertainty around valuations of AI stocks and the unresolved West Asia conflict as risks to the global outlook.

8. El Niño poses a risk to rural demand

The RBI flagged a deficient southwest monsoon and strong El Niño conditions as risks to agriculture and rural demand. It said healthy foodgrain stocks and proactive government measures could help contain the impact. Continued momentum in services and broadly stable employment conditions are expected to support urban demand.

9. Limited signs of supply shocks feeding into pricing

The RBI said there is some evidence of higher inflation expectations and broader price pressures, but only limited signs that supply-side shocks are becoming embedded in firms’ pricing behaviour. It said monetary policy would focus on containing these second-round effects, while noting that strong growth in monetary and credit aggregates poses a risk from the demand side.

10. Account Aggregators to become interoperable

The RBI will allow interoperability among non-banking financial company Account Aggregators, allowing customers to access and share their financial information across different financial information providers through one Account Aggregator of their choice. The measure is expected to be implemented by December 31, 2026.