India's central bank raises repo rate to 5.5% in first hike in nearly four years

India’s central bank raises repo rate to 5.5% in first hike in nearly four years

MUMBAI: The Reserve Bank of India raised its benchmark repo rate by 25 basis points to 5.50 per cent on Wednesday, the first increase in nearly four years, as surging oil prices and food inflation forced the central bank’s hand. The RBI rate hike also came with a hawkish shift in stance, from neutral to “calibrated tightening”, signalling that rate cuts are off the table for now.

The six-member MPC voted unanimously at its 63rd meeting, held from October 5 to 7 under Governor Sanjay Malhotra. The last hike came in February 2023, when the rate rose to 6.50 per cent after the Russia-Ukraine war; the RBI began cutting rates in 2025 before Wednesday’s reversal.

“It is clear that the outlook for inflation is no longer benign,” Malhotra said in his policy address, setting the tone for a tightening cycle that economists expect to continue.

Why the RBI moved now

India’s retail inflation accelerated to 4.82 per cent in August from 4.45 per cent in July, staying above the RBI’s 4 per cent medium-term target for a third straight month. Nearly half of the consumer basket is now seeing inflation above 4 per cent, with fuel and food prices rippling through the economy.

Two forces are driving the pressure. Oil prices have spiked since the West Asia conflict began in late February, a direct challenge for an oil-importing country like India. Weak monsoon rains linked to El Nino have compounded the problem, threatening food prices in Asia’s third-largest economy.

The rupee has been sliding towards its all-time low, touching 96.96 against the dollar intraday on Wednesday. Malhotra said the RBI would ensure it stabilises and finds its “correct value” without excessive volatility.

Strong growth gave the RBI room to act. GDP expanded 7.8 per cent in the April-June quarter, well above the central bank’s own forecast, and the RBI raised its growth projection for FY27 to 7.1 per cent while lifting its inflation forecast to 5.2 per cent.

What the RBI rate hike means for borrowers

The increase will reach borrowers: home, vehicle and corporate loans on floating rates get costlier, and EMIs will rise as banks pass the hike through.

The standing deposit facility rate moved to 5.25 per cent, while the marginal standing facility rate and the bank rate rose to 5.75 per cent.

Economists see more tightening ahead, with the repo rate possibly reaching 5.75 per cent and further hikes likely at the December and February meetings.

A global tightening wave

India is not moving alone. The US Federal Reserve raised rates by 25 basis points last month to rein in inflation brought on by spiralling oil prices, and the European Central Bank had earlier raised its key rate by the same margin.

Nearly 60 per cent of economists in a Reuters poll had expected the increase, so the surprise was the stance change: “calibrated tightening” tells investors further hikes are on the table. For Pakistan, the channel is oil: a stronger dollar and dearer crude feed imported inflation, and Pakistan has just revised petrol prices upward to Rs394.83 per litre.

FAQs

What is the repo rate now in India?

The repo rate now stands at 5.50 per cent after the RBI’s 25-basis-point hike on October 7, 2026. The standing deposit facility rate is 5.25 per cent, and the marginal standing facility rate and bank rate are 5.75 per cent.

When was the last RBI rate hike before this one?

February 2023, when the rate rose from 6.25 to 6.50 per cent. Rates stayed unchanged through 2023-24, a rate-cut cycle began in 2025, and Wednesday reversed it.

Why did the RBI raise rates?

Retail inflation hit 4.82 per cent in August, above the 4 per cent target for a third straight month, driven by fuel and food prices. With GDP growth at 7.8 per cent, the RBI judged the economy could absorb tighter policy.

Will there be more hikes?

Economists expect at least one more hike, possibly taking the repo rate to 5.75 per cent, with the December and February MPC meetings in focus. The “calibrated tightening” stance means cuts are off the table for the foreseeable future.