RBI raises repo rate to 5.5% in first hike since 2023 and says rate cuts are off the table

The Reserve Bank of India (RBI) has raised its key lending rate for the first time in more than three years. On Wednesday, 7 October, its Monetary Policy Committee (MPC) lifted the repo rate by 25 basis points, from 5.25% to 5.5%. “Repo rate” has been one of the most searched terms in India since.

The decision at a glance

• Repo rate: up 25 basis points to 5.5%, the first hike since February 2023.
• Other rates: the Standing Deposit Facility rate is now 5.25%, and the Marginal Standing Facility and Bank Rate are 5.75%.
• Vote: the MPC, which met from 5 to 7 October, voted unanimously for the hike.
• Stance: changed from “neutral” to “calibrated tightening”, by a 4-2 majority according to Business Today.

Why the RBI raised rates

Governor Sanjay Malhotra said inflation risks are no longer benign. The RBI pointed to high oil prices, tighter global financial conditions and the risk that bad weather pushes up food prices. A weak southwest monsoon and a strong El Niño could hurt farm output and rural demand, though the RBI said healthy foodgrain stocks and government measures should limit the damage.

Malhotra said rate cuts are off the table for now. How long the tightening lasts and how far it goes will depend on how growth and inflation actually turn out.

Growth and inflation forecasts

The RBI raised its forecast for real GDP growth in 2026-27 to 7.1%. It expects CPI inflation to average 5.2% this year, rising to 6% in the October-December quarter.

What it means for your EMI

Loans linked to the repo rate are the first to get costlier, though banks pass on changes at different speeds. Oneindia worked out that on a Rs 50 lakh, 30-year home loan, a 0.25 percentage-point rise from 7.25% to 7.5% lifts the monthly EMI by about Rs 852, from Rs 34,109 to Rs 34,961. Some banks may extend the loan tenure instead of raising the EMI.

Reaction

ASSOCHAM’s Nirmal K Minda said higher borrowing costs could slow spending and fresh investment, especially for small businesses, though the effect should build gradually. NAREDCO’s Praveen Jain expects little impact on housing demand during the festive season. Economists are divided on what comes next: ICRA’s Aditi Nayar expects one more hike in December, while Elara Capital’s Garima Kapoor sees room for another 50 basis points in this cycle.

According to Business Standard, the rupee weakened to about 96.57 to the US dollar and bond yields rose to 7.27% after the announcement.

Sources: Business Standard, Business Today, Oneindia.