Reserve Bank of India Raises Repo Rate 25 Basis Points to 5.50% in First Hike Since 2023

India's central bank raised its benchmark repo rate by 25 basis points to 5.50% on Wednesday, October 7, marking its first rate increase in nearly four years and rejoining a global wave of monetary tightening. The move, which matched economist forecasts, was driven by a worsening inflation outlook tied to elevated crude oil prices amid the ongoing Middle East conflict, a weakening rupee, and retail inflation running at 4.8% in August, above the RBI's 4% target for ten consecutive months.

The Monetary Policy Committee, chaired by Governor Sanjay Malhotra, voted unanimously to raise the rate but shifted its policy stance to "calibrated tightening" by a 4-2 majority, a signal that analysts said was the more significant takeaway since the hike itself had already been priced in. The accompanying rate corridor adjustments set the Standing Deposit Facility rate at 5.25% and the Marginal Standing Facility rate and Bank Rate at 5.75%. The RBI also revised its FY27 headline CPI inflation projection to 5.2%, with quarterly estimates of 4.9% for Q2, 6.0% for Q3, and 5.7% for Q4, while lifting the core inflation estimate to 4.4% from 4.3%. The FY27 real GDP growth forecast was upgraded by 40 basis points to 7.1%, supported by resilient private consumption and investment. Foreign exchange reserves stood at $734.6 billion, providing roughly 11 months of import cover.

Indian equity markets fell sharply after the announcement, with the Sensex dropping more than 450 points and the Nifty sliding below 22,600, weighed down further by rising Brent crude prices and higher US bond yields. Automobile stocks bore the brunt of the selling, with Tata Motors, Maruti Suzuki, Mahindra and Mahindra, and Hyundai Motor India all declining as much as 3%. Bank stocks initially fell but partly recovered, with PNB, Kotak Mahindra Bank and others rising up to 2% as the Nifty Bank index climbed back above 55,500. India VIX climbed 3%. Bajaj Finance moved quickly to raise fixed deposit rates by up to 40 basis points in response to the higher policy rate.

HSBC and Goldman Sachs both said they expect the RBI to raise rates again in December, and the stance change to calibrated tightening effectively rules out near-term cuts. A new UPI merchant discount rate of 0.4% on person-to-merchant transactions above 2,000 rupees takes effect October 15, with Governor Malhotra saying it will not disrupt digital payment momentum.