RBI Increases Repo Rate by 25 Basis Points, Citing ‘Rate Cuts Off the Table’ While Upgrading GDP Growth Forecast to 7.1%
RBI Governor Sanjay Malhotra announced a 25 basis points increase in the repo rate on Wednesday, bringing it to 5.50%. This decision by the Monetary Policy Committee (MPC) aligns with similar actions taken by the US Federal Reserve, as central banks worldwide respond to rising inflationary pressures. Malhotra noted that geopolitical tensions, particularly the recent escalation of conflict in West Asia, have contributed to volatility in global crude prices and economic sentiment.
Factors Behind the Rate Hike
The MPC’s decision was influenced by persistent inflationary pressures and stronger-than-expected economic growth. While the repo rate hike aims to manage inflation, the committee believes it will not significantly hinder GDP growth. Despite global economic challenges, the Indian economy remains robust, with growth momentum observed across various sectors. The RBI has revised its real GDP growth forecast for the current financial year from 6.7% to 7.1%.
Inflation, however, presents a different challenge. The MPC projects headline CPI inflation to average nearly 5.8% over the next three quarters, with core inflation expected to average 4.4% for the year. The committee acknowledged that the inflation outlook is less favorable than in the previous year, necessitating a recalibration of the policy rate.
Inflation Outlook and Policy Stance
The MPC noted that inflation is influenced by supply-side factors, which complicate the effectiveness of monetary policy. While there are signs of rising inflation expectations and widespread price pressures, evidence of entrenched supply-side inflation in firm pricing behavior remains limited. The RBI has also raised its inflation forecast for the financial year 2026-27 from 5% to 5.2%.
Malhotra highlighted that the near-term inflation outlook is pressured by factors such as a deficient Southwest monsoon, El Niño conditions, and high volatility in international oil prices. The MPC unanimously decided to raise the policy repo rate to 5.50% and shifted its stance to calibrated tightening. This change indicates that rate cuts are not anticipated in the near term, with future policy actions likely to involve either further rate hikes or pauses depending on evolving economic conditions.
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