RBI raises policy rates 25 bps to tame inflation as India hurdles growth barriers

Mumbai: Monetary policymakers at the Reserve Bank of India (RBI), as widely expected, unanimously voted Wednesday to raise the benchmark repo rate by 25 basis points to 5.50% amid higher inflation projections and surging US bond yields. However, it also helped reinforce India’s world-leading growth credentials with a 40-basis-point increase in FY27 economic-expansion estimates to 7.1%.

One basis point is a hundredth of a basis point.

Against a backdrop of rising rates from Tokyo to Washington, the RBI pivoted toward hardening policy rates for the first time in three years as an energy-supply chokehold and scanty rains bumped up consumer inflation projections by 20 basis points.


Ahead of the policy announcement, 20 of the 21 bank executives, analysts and economists polled by ET expected monetary policymakers to raise rates by 25 basis points.

The RBI now expects consumer price inflation (CPI) to average 5.2% through FY 27 - up from its earlier projections of 5%. The central bank has a flexible inflation target of 4%, with a 2 percentage point latitude in either direction.

“It is clear that inflation and its outlook are not benign as they were last year, with headline CPI inflation expected to average almost 5.8% in the next three quarters and core inflation projected at 4.4 per cent this financial year. In this milieu, recalibrating the policy rate is imperative,” Governor Sanjay Malhotra said in his statement.

More importantly, the MPC also decided to change the stance to ‘calibrated tightening’ from ‘neutral’, underscoring that in the current conditions, rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions.

“The duration and extent of the rate hike cycle would be contingent on the actual growth-inflation developments and outlook, especially that of underlying inflation, the extent of broadening of price pressures and second-round effects of the supply shock, as also the impact of demand impulses,” Malhotra said.

Two members on the panel - Nagesh Kumar and Ram Singh - were of the view the stance be retained as neutral. In its statement, the monetary policy committee (MPC) reiterated it remains committed to its price-stability mandate and will seek to progressively align inflation with its target.

'Growth Engine'

Governor Malhotra, however, said that domestic economic activity remains resilient as evident from real GDP growth of 7.8% in the first quarter of the current fiscal, driven by resilient private consumption, strong investment activity and positive net exports.

The central bank also revised the GDP forecast for the current fiscal year to 7.1% from 6.7% projected earlier.

“The upward revision in growth forecast by 40 basis points further underscores the strength of economic activity despite significant headwinds,” Malhotra said.

Revisions in growth projections come just a day after the World Bank said India, despite global headwinds, would expand at 7.1% in the current fiscal year.

Looking ahead, global economic uncertainty, the lingering West Asia conflict and its impact on oil prices, a deficient south-west monsoon and strong El Niño conditions will continue to have some bearing on domestic economic conditions, the MPC said.

The Price Pinch

That helped explain the rise in inflation projections. Second quarter CPI is now projected at 4.9% from 4.7% earlier, third quarter at 6% versus 5.9% earlier, and fourth quarter at 5.7% from 5.5% earlier.

Inflation is expected to remain elevated at 5.6% in the first quarter of the next fiscal year, up from the 5.3% estimated earlier.

“Price pressures are increasingly becoming visible across a range of commodities within the food component, apart from oil. In addition, early signs of inflation becoming generalised are also evident from the increase in core inflation and higher inflation across a larger segment of the CPI basket,” Malhotra said.

The rupee, which had opened around Rs 96.40 per dollar versus Tuesday’s close of Rs 96.35 per dollar, weakened to Rs 96.53 per dollar. The benchmark ten-year bond yield, which had closed around 7.20%, rose to 7.26% after the policy announcement.

Equity markets remained weak, with the Sensex retreating 0.13% while the Nifty fell 0.33%.

The next monetary policy meeting is scheduled to be held on December 4.