RBI hikes repo rate by 25 basis points

The rate increase comes after a considerable hiatus.

The last increase was done in February 2023.

The repo rate is the interest rate at which the Reserve Bank of India lends short‑term funds to commercial banks against government securities. It is a key monetary policy tool used to control liquidity in the economy.

The reverse repo rate is the interest rate at which the Reserve Bank of India borrows money from commercial banks when they have surplus funds. It helps the RBI to absorb excess liquidity from the banking system.

Consequent to the rate increase, the standing deposit facility (SDF) rate is adjusted at 5.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 5.75 per cent.

The Standing Deposit Facility (SDF) is the Reserve Bank of India’s collateral‑free tool introduced on 8 April 2022 that allows banks to park surplus funds with the RBI overnight at an interest rate set 25 basis points below the policy repo rate. The Marginal Standing Facility (MSF) is an overnight emergency borrowing window through which scheduled commercial banks can borrow funds from the Reserve Bank of India (RBI) at a rate above the repo rate.

The MPC also decided to change the stance to calibrated tightening.

The repo rate hike was largely expected given the rising inflation, West Asia war-related impact on oil prices and rupee depreciation.  Though the GDP (gross domestic product) number is encouraging, the MPC has chosen to break the rate hike drought and follow the cues from central banks across the globe. The MPC move will have wider cost implications across the board. From consumers’ point of view, the repo rate increase will stretch the repayment tenor if they have taken loans and paid EMI (equated monthly instalment).  How will the MPC action impact the demand in the ensuing festival season? This has to be watched. With the central bankers across the world opting for rate hikes, the monetary policy managers have little leeway but to follow them.

Global economy in flux

“Since the last MPC meeting in August 2026, the re-escalation of the conflict in West Asia and the consequent sharp volatility in crude oil prices has kept the global economy in a state of flux. Global growth has remained resilient. Acceleration of inflation in key economies has prompted a shift towards hawkish monetary policy. The US Fed hiked by 25 bps in September. The Fed commentary thereafter along with rate tightening by major systemically important central banks has reinforced expectations of higher global policy rates. Tighter global financial market conditions coupled with fiscal sustainability concerns in major economies are keeping global bond yields at record high levels. With a resolution of the West Asia conflict remaining elusive,   significant downside risks to the global outlook remain, including further tightening of global financial conditions, continuing elevated AI-related asset valuations and high public debt,” a MPC statement said.

Economy remains resilient

“Notwithstanding these persisting global headwinds, the Indian economy has remain resilient. As per National Statistics Office (NSO) estimates, real GDP growth in Q1:2026-27, at 7.8 per cent, was higher than expected. Strong private consumption and fixed investment, rebound in merchandise exports and sustained buoyancy in services exports supported growth. On the supply side, the manufacturing sector grew at a robust pace. Services sector activity strengthened further, owing to buoyant domestic and external demand.  In Q2, available high frequency indicators for July-August suggest sustained momentum in domestic economic activity. Domestic demand remains resilient and is well supported by robust external demand with merchandise exports registering double-digit growth. Looking ahead, global economic uncertainty will continue to have some bearing on domestic economic activity. While energy prices and supply chain pressures have continued, their near-term trajectory remains uncertain amidst the lingering West Asia conflict. Their adverse impact is being contained with active diversification of supply sources. Deficient south-west monsoon and strong El Niño conditions pose risks to agriculture sector’s outlook and rural demand, although a healthy buffer of foodgrains and proactive policy interventions by the government are expected to mitigate the impact. Furthermore, continuing momentum in services and broadly stable employment conditions are likely to support urban demand. Strong capacity utilisation, robust credit flows and the government’s thrust on infrastructure are expected to sustain investment activity. While services exports are expected to remain buoyant, bilateral trade agreements should boost merchandise exports. Taking all these factors into consideration, real GDP growth for 2026-27 is projected at 7.1 per cent, with Q2 at 7.2 per cent; Q3 at 6.9 per cent and Q4 at 6.8 per cent. Real GDP growth for Q1:2027-28 is projected at 7.1 per cent,” the statement added.