The decision was widely expected and marks the beginning of a new cycle of monetary tightening amidst extremely turbulent conditions in international commodity and capital markets. The Monetary Policy Committee (MPC) of the Reserve Bank of India increased the policy rate by 25 basis points – one basis point is one hundredth of a percentage point – taking it to 5.5% on Wednesday.
GDP growth for 2026-27 is now projected at 7.1%, 40 basis points higher than August forecast. The biannual Monetary Policy Report believes that GDP growth for 2027-28 will be 7% under assumptions of a normal monsoon and no major exogenous or policy shock. Benchmark inflation, as measured by Consumer Price Index (CPI) is seen at 5.2% for the full fiscal year, higher than the 5% projection in August. Core inflation, which excludes the food and fuel components of the CPI basket is seen growing at 4.4% in the current fiscal year. Quarterly growth projections stand at 7.2%, 6.9%, 6.8% and 7.1% for the quarters ending September 2026, December 2026, March 2027 and June 2027. The respective inflation numbers are 4.9%, 6%, 5.7% and 5.6%.
“It is clear that inflation and its outlook are not benign as they were last year,” Governor Sanjay Malhotra said in his statement.
That MPC would hike rates, and along with its growth and inflation forecasts was widely believed. With the stance change to calibrated tightening, the conviction on a 75bps rate hike cycle has increased. What was being awaited was RBI’s reading of the larger economic situation given the worsening of the geopolitical situation in West Asia, surge in advanced economy bond yields including 10-year US treasuries which serve as a global bellwether for interest rates, the US Federal reserve raising interest rates and the continuing rally in AI-linked equity prices. Also Read I RBI raises repo rate by 25 points in first hike in four years, loan EMIs may rise “We were expecting 50-75bps of rate hikes in this cycle. If RBI pushes the repo rate to 6% by the February 2027 policy meeting, then in April 2027, the real policy rate based on forward looking inflation (Citi forecast) could be in the 150-200bps range.
“The near-term outlook on inflation points towards continued pressures from supply side on account of the deficient monsoon, ongoing El Niño conditions and high energy and other commodity prices, the pass through of which is still continuing”, the latest MPC resolution says. This paints a different and more adverse picture from what the MPC said in August when it believed that “the higher inflation is mostly on account of fuel and food with little signs of generalisation of price pressures so far”. This could provide MPC the space to pause and reflect on the need for further tightening, especially if there is some moderation in growth”, Citibank Chief India Economist Samiran Chakraborty said in a note.
