‘Rate cuts off the table’: Why RBI hiked repo rate by 25 basis points but also raised GDP growth forecast to 7.1%
RBI governor Sanjay Malhotra announced the Monetary Policy Committee’s (MPC) decision to hike repo rate by 25 basis points on Wednesday. Repo rate is the rate at which RBI lends money to banks and it now stands at 5.50%. The rate hike by RBI follows a similar increase by the US Federal Reserve last month as global inflationary pressures prompt central banks to tighten liquidity.“The sudden reescalation of the West Asia conflict in September and the consequent hardening and volatility in global crude prices soured global economic sentiments and heightened financial market volatility. Although global growth remains resilient, it is projected to decelerate in 2026 from the previous year,” Sanjay Malhotra said.But amid all the global uncertainty, India’s growth remains strong, the central bank noted.Also Check | RBI MPC Meeting October 2026 Live Updates: RBI governor Sanjay Malhotra announces 25 bps repo rate hike; your EMIs set to go up
Why RBI hiked repo rate by 25 basis points
Two factors worked to decide MPC’s move: inflationary pressures persist and growth is beating estimates. Hence, a hike in repo rate, while helping keep inflation in check, is unlikely to substantially impact GDP growth.The MPC observed that geopolitical developments continue to make the global environment difficult. But, despite these external challenges, the Indian economy has remained robust, with growth momentum spread across various segments. The committee expects the economy to retain its resilience.In fact, the RBI has raised the real GDP growth forecast for the current financial year from 6.7% to 7.1% reflecting the confidence in the growth story.But inflation is a different story.The available data indicates that the inflation situation and its outlook are less favourable than they were last year. Headline CPI inflation is projected to average nearly 5.8% over the next three quarters, while core inflation is expected to average 4.4% during the current year. Against this backdrop, the MPC considered a recalibration of the policy rate necessary.When inflation originates from supply-side factors, monetary policy mainly works by containing the second-round impact, including changes in inflation expectations and pricing behaviour at the firm level. Such effects take time to emerge and can be difficult to identify separately from the available data, the MPC noted in its statement.There is some evidence that inflation expectations have risen and that price pressures are becoming more widespread. However, there are only limited indications that supply-side inflationary pressures have become firmly embedded in the pricing behaviour of firms.Likewise, there is limited evidence of demand-driven inflationary pressures at present. However, the strong expansion in monetary and credit aggregates creates risks that also need to be taken into account.RBI has raised its inflation forecast for financial year 2026-27 from 5% earlier to 5.2%.“The near-term outlook on inflation points towards continued pressures from the supply side, on account of the deficient Southwest monsoon, El Nino conditions and high volatility in international oil prices,” RBI governor said.“Price pressures are increasingly becoming visible across a range of commodities within the food component, apart from oil. In addition, early signs of inflation becoming generalised are also evident from the increase in core inflation and higher inflation across a larger segment of the CPI basket,” he added.After considering these factors, the MPC unanimously decided to raise the policy repo rate by 25 basis points to 5.50%. It also changed its policy stance to calibrated tightening.“It only signals that given the current conditions, rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook,” the MPC statement said.The length and magnitude of the rate-hike cycle will depend on how growth and inflation actually develop and how their outlook changes.Particular attention will be paid to underlying inflation, the extent to which price pressures spread more broadly, the emergence of second-round effects from the supply shock, and the influence of demand impulses.
