Mumbai, Oct 7 (NVI) The Reserve Bank of India (RBI) today announced increase in Repo Rate by 25 basis points (or 0.25%), marking the first hike since February 2023 in the rate at which the central bank lends money to other banks.
The decision to increase repo rate from 5.25 per cent to 5.5 per cent was taken by the Monetary Policy Committee (MPC) headed by RBI Governor Sanjay Malhotra. This comes amid rising inflation, higher oil prices, and a weaker rupee.
The RBI has also raised its core inflation forecast for the current financial year to 4.4 per cent from 4.3 per cent earlier.
In his MPC address, Malhotra said, “Global inflation is expected to rise. Trade uncertainty continues to linger. Global sentiment remains fragile. The impact of the Iran war could also disrupt trade and supply chains.”
However, he added that the Indian economy remains strong and is expected to stay resilient. “Rate cuts are off the table in the near term,” said the RBI governor.
In a first since 2018, the central bank changed its monetary policy stance from “neutral” to “calibrated tightening”. A neutral stance means the RBI is keeping its options open. It can raise or cut interest rates depending on how inflation and growth evolve.
On the other hand, “calibrated tightening” sends a different signal. It means the RBI is now leaning towards tighter monetary policy and is prepared to act if inflationary pressures persist. In simple terms, the shift suggests that rate cuts are off the table in the near term, while another hike cannot be ruled out if inflation risks worsen.
The rate hike has come despite a stronger growth outlook.
The RBI has raised its real GDP growth forecast for the year to 7.1 per cent from 6.7 per cent earlier.
The central bank said economic activity has maintained momentum in the second quarter, covering July to September.
Manufacturing activity has held up despite cost pressures. The services sector remains steady and broad-based. Fixed investment is also continuing to remain strong. Private consumption and investment are expected to remain key drivers of growth. Net exports have also stayed positive.
There are, however, some weak spots. The RBI flagged weakness in non-durable goods and domestic air traffic. Supply chain disruptions could also weigh on growth.
A weak monsoon and the possibility of an El Nino event could affect the Rabi season.
At the same time, rural and urban demand is expected to remain sustained. (NVI)
