RBI MPC Meeting 2026: Malhotra & Co hike repo rate by 25 bps to 5.50% for first time in nearly 4 years as inflation pressures build

The Reserve Bank of India’s Monetary Policy Committee (MPC) on Wednesday raised the repo rate by 25 basis points to 5.50%, its first rate hike in nearly four years, as rising oil prices amid US-Iran tensions and a weak monsoon threaten to push inflation higher.

The six-member rate panel voted unanimously in favour of the rate hike. The committee changed its policy stance to calibrated tightening from neutral, signaling further rate hikes may be on the table.

The repo rate was last raised in February 2023, when it was increased by 25 basis points to 6.50%.


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Of the 21 economists and bank executives polled by ET, 20 had expected the RBI to raise rates.

The move marks the first rate hike under Governor Sanjay Malhotra, who took office in December 2024 and oversaw a series of rate cuts last year. It also puts the RBI in line with several Asian peers like Bank of Japan and Bank of Korea that have started tightening policy in response to renewed inflation pressures.

The MPC “observed, in light of the available data, that it is clear that inflation and its outlook are not benign as they were last year,” Malhotra said in a televised statement from the RBI headquarters in Mumbai. Against that backdrop, he added that “recalibrating the policy rate” had become “an imperative.”

The RBI’s revised stance “underscored that given the current conditions, rate cuts are off the table in the near term, and policy action can only be a hike or a pause, depending on the evolving conditions,” Malhotra added.

ALSO READ | RBI raises FY27 GDP forecast to 7.1% from 6.7%

Since the RBI’s last policy meeting in August, oil prices have surged above $100 a barrel, the rupee has weakened and inflation has accelerated.

With inflation nearing 5% in the last three month and expected to move closer to the upper end of the RBI’s 2%-6% tolerance band in the December quarter, economists expect the central bank to continue tightening.

On the macroeconomic front, the central bank upgraded India’s growth forecast for fiscal year 2026-27 to 7.1% from 6.7%. In addition to this, it revised its FY27 inflation target upward to 5.2% from 5.0%.

Consequently, the standing deposit facility (SDF) rate stands adjusted at 5.25% and the marginal standing facility (MSF) rate and the Bank Rate at 5.75%.

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The RBI's hike acknowledges that cyclical inflation risks are no longer benign, said Radhika Rao, senior economist, DBS Bank, adding that a change in stance also underscored the RBI MPC's "hawkish intent."

"Against a backdrop of elevated oil prices, tighter global conditions, and risks to food inflation from unfavourable weather, policymakers have chosen to reinforce inflation credibility before risks become entrenched."

ALSO READ | Central bank raises inflation forecast to 5.2% for FY27

The benchmark 10-year bond yield rose as much as seven basis points to 7.27% after the decision. The rupee was largely steady at 96.40 to a dollar.

Crude back above $100 a barrel

Escalating conflict in the Middle East has pushed crude prices above $100 a barrel, threatening to raise costs across an economy that imports most of its energy. A weak monsoon, meanwhile, could add to pressure on food prices.

Brent crossed $101 today. It ended September at around $103, well above the RBI’s FY27 forecast of $85 a barrel. Goldman Sachs has also outlined a scenario in which oil prices could rise to as much as $120 a barrel if attacks on vessels in the Middle East intensify. If exports return to normal, the bank expects oil prices to move back towards $80 a barrel.

The combination of higher crude prices and supply disruptions has added to inflation concerns globally. Domestically, economists see inflation potentially rising above the RBI’s 6% tolerance limit in the third quarter.

The narrowing interest-rate differential between India and the US is another factor that weighed on the RBI’s decision.

A narrower gap can make US assets relatively more attractive to investors and add pressure on the rupee.

Foreign investors have pulled a record amount from Indian equities this year, amid elevated US yields, high oil prices and a weaker rupee. The NSE Nifty 50 has declined for eight consecutive weeks—its longest losing streak in 25 years.

Too much cash

The RBI is also dealing with a large pool of excess liquidity that has pushed overnight borrowing costs below the policy rate, making financial conditions easier than intended.

Much of the surplus came from the RBI’s June push to attract foreign-currency deposits to support the rupee. The move brought in about $133 billion, far above initial expectations of $50 billion-85 billion. While the inflows strengthened India’s external buffers, they also injected a large amount of liquidity into the banking system at a time when inflationary pressures were building.

The central bank has already drained more than ₹1 lakh crore ($10.4 billion) through bond sales and other measures, as per Bloomberg.

Traders will now look for signals on how aggressively the RBI plans to absorb the remaining surplus alongside further rate hikes.