RBI Raises Repo Rate by 25 bps to 5.50%, Lifts FY27 Growth Forecast to 7.1%

The Reserve Bank of India on Wednesday raised its policy repo rate by 25 basis points to 5.50 per cent, starting a rate-hike cycle, and increased its growth forecast for the current financial year by 40 basis points to 7.1 per cent.

Governor Sanjay Malhotra announced the outcome of the Monetary Policy Committee meeting in Mumbai. The decision reverses the August policy, when the committee held the rate at 5.25 per cent with a neutral stance while it waited for more clarity on inflation and growth.

"After a detailed assessment of the evolving macroeconomic and financial conditions, developments and the outlook, the MPC voted unanimously to increase the policy repo rate by 25 basis points," Malhotra said.

The standing deposit facility rate is now 5.25 per cent, and the marginal standing facility rate and Bank Rate are 5.75 per cent. The committee changed its stance to "calibrated tightening" by a majority vote.

WHY NOW

Rising inflation risks drove the move. Retail inflation was 4.82 per cent in August, and economists expect it to cross 5 per cent during 2026-27, peaking around 5.9 per cent in the third quarter. A deficient monsoon and crude oil at about $100 a barrel add to the risks.

Global conditions have also hardened. The US Federal Reserve raised its policy rate by 25 basis points in September, and the US 10-year Treasury yield is around 5.3 per cent. The rupee was trading at 96.36 to the dollar at the time of reporting.

Liquidity was another consideration. The RBI's special forex swap facility has mobilised $132.98 billion through FCNR(B) deposits as of August 31, adding substantial liquidity to the banking system and increasing the need for what the central bank called calibrated absorption.

GROWTH FORECAST RAISED

Malhotra put real GDP growth for 2026-27 at 7.1 per cent, with 7.2 per cent in the second quarter, 6.9 per cent in the third and 6.8 per cent in the fourth. He said the 40 basis point upgrade reflects the strength of economic activity despite the global challenges.

"We exhibited resilience amidst global headwinds, as evident from real GDP growth of 7.8 per cent in Q1," he said. Private consumption and investment, which grew almost 12 per cent, supported that growth, and net exports also contributed positively.

WHAT IS HOLDING UP

High-frequency indicators suggest activity kept its momentum in the second quarter, though with some moderation from the first. Manufacturing has stayed steady despite cost pressures, and services have remained broad-based. Both PMIs stayed in expansion territory, but at a slower pace than in Q1. Fixed investment remained strong.

Merchandise exports grew at a high double-digit rate in July and August, helped by efforts to expand market access and diversify markets, and services exports accelerated.

WHERE THE WEAK SPOTS ARE

Malhotra noted weakness in non-durable goods and domestic air passenger traffic. He said global uncertainty and supply chain disruptions could affect activity, and that a weak southwest monsoon and strong El Niño conditions could hurt the rabi season and rural demand.

Continued infrastructure spending, a revival in private capital expenditure and strong credit flows should support investment, he said. Services exports are expected to stay buoyant, and newly operational bilateral trade agreements should help merchandise exports.

The decision is expected to set the direction for policy in the coming months. Economists earlier saw scope for cumulative tightening of up to 75 basis points, with the repo rate potentially reaching around 6 per cent by the end of FY27, depending on inflation, oil prices and global financial conditions.

The move comes as wholesale inflation has run close to 10 per cent. WPI inflation was 9.92 per cent in August, the fourth straight month above 9 per cent, driven largely by fuel and manufactured goods. The RBI's new growth forecast also puts it in line with the World Bank, which raised its estimate for India to 7.1 per cent on Tuesday.

With inputs from ANI