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The Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 5.5% on Wednesday, marking its first rate increase since February 2023. The six-member Monetary Policy Committee (MPC) unanimously approved the hike after its October 5-7 meeting. The central bank also changed its policy stance from ‘neutral’ to ‘calibrated tightening’. Thus, signalling that further rate increases remain possible if inflation risks persist. The move comes as inflationary pressures intensify despite strong economic growth.
Retail inflation rose to 4.82% in August, remaining above the RBI’s 4% medium-term target for the third consecutive month. Higher crude oil prices, food inflation, and weather-related risks have heightened concerns about the inflation outlook.
The RBI raised its FY27 inflation projection to 5.2% from 5% earlier. Governor Sanjay Malhotra said inflation expectations were rising and price pressures were becoming broader.
The central bank, however, retained confidence in economic growth. It raised its FY27 GDP growth forecast to 7.1% from 6.7%. India’s economy grew 7.8% in the April-June quarter, exceeding the RBI’s earlier projection of 7%.
The repo rate hike is likely to increase borrowing costs for customers with floating-rate loans linked to external benchmarks. Banks may transmit the 25-bps increase through higher interest rates, depending on their reset cycles.
For a Rs. 50 lakh home loan with a 20-year tenure, a 25-bps increase could raise the monthly EMI by around Rs. 780 if the entire rate increase is passed on and the tenure remains unchanged. Borrowers may instead see lenders extend the loan tenure to limit the immediate EMI increase.
Fixed-rate borrowers are not expected to see an immediate impact from the policy move. However, new loans and refinancing could become more expensive as lenders adjust pricing.
Also Read: Rupee Falls Despite RBI Action: Why Investors are Watching RBI’s Dollar Reserves?
