RBI raises repo rate to 5.5% as inflation pressures intensify
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Mumbai: The Reserve Bank of India on Wednesday raised its benchmark repo rate by 25 basis points to 5.5%, marking its first increase in nearly four years as inflationary pressures intensify.
The repo rate, which determines the interest rate at which the central bank lends to commercial banks, is reviewed by the Monetary Policy Committee (MPC) every two months. The previous increase came in February 2023, when the RBI raised the rate by 25 basis points to 6.5%.
The latest move follows a series of rate cuts last year. The MPC reduced the repo rate by 25 basis points to 5.25% in December and subsequently kept it unchanged in February, April, June and August.
The MPC also shifted its monetary policy stance from “neutral” to “calibrated tightening”, signalling a greater focus on containing inflation. RBI Governor Sanjay Malhotra said price pressures and the inflation outlook had become less favourable compared with the previous year.
Consumer price inflation is now expected to average around 5.8% over the next three quarters, while core inflation, which excludes food and fuel, is projected at 4.4% for the current financial year.
A higher repo rate generally raises borrowing costs for commercial banks, which can make loans more expensive for consumers and businesses. The RBI uses such monetary tightening to moderate demand and contain inflation.
Despite the inflation risks, the central bank raised its projection for India’s real gross domestic product growth to 7.1% for the financial year, from the earlier estimate of 6.7% made in August.
Malhotra warned that geopolitical tensions, elevated global commodity prices, trade-related disruptions and tighter financial conditions could weigh on economic expansion.
The rate increase comes as major central banks respond to inflationary pressures linked to higher oil prices amid the West Asia conflict. Weak monsoon rainfall associated with El Niño has also contributed to concerns over domestic price pressures.