The RBI Has Raised Rates For The First Time Since February 2023

The Reserve Bank of India's Monetary Policy Committee raised the repo rate by 25 basis points to 5.5 per cent on Wednesday and changed its stance from neutral to calibrated tightening. The decision was unanimous.

It is the first increase since February 2023. The repo rate had been cut by a cumulative 125 basis points during 2025, from 6.5 per cent to 5.25 per cent, where it stayed through four consecutive meetings before this one. The committee met from 5 to 7 October.

Governor Sanjay Malhotra said rate cuts are off the table in the near term, and that future action can only be a hike or a pause depending on how growth and inflation evolve. He said inflation and its outlook were no longer as benign as last year, with headline CPI expected to average almost 5.8 per cent over the next three quarters.

The RBI raised its FY27 CPI inflation forecast to 5.2 per cent from 5 per cent in August, projecting 4.9 per cent in the second quarter, 6 per cent in the third and 5.7 per cent in the fourth, and 5.6 per cent in the first quarter of FY28. Core inflation is projected at 4.4 per cent for 2026-27.

CPI inflation rose to 4.8 per cent in August from 4.5 per cent in July, with core inflation at 4.2 per cent. Brent crude has moved above $100 a barrel.

Real GDP growth for FY27 is projected at 7.1 per cent, with 7.2 per cent in the second quarter, 6.9 per cent in the third and 6.8 per cent in the fourth.

The benchmark 10-year bond yield rose six basis points, with the change in stance reported as a surprise to the market. The rupee had slipped 10 paise to 96.45 against the dollar ahead of the decision.

The forecast revision explains the decision better than the rate move does.

A quarter point takes the repo rate back to where it sat for most of last year, which on its own is unremarkable. What changed is the path. The RBI now expects inflation to touch 6 per cent in the third quarter of this financial year, which is the upper bound of its tolerance band, and to average close to 5.8 per cent across the next three quarters.

That is a different economy from the one the committee was describing twelve months ago. In October 2025 it cut the FY26 inflation forecast to 2.6 per cent and spoke of food prices and GST rationalisation pulling prices down. By December it had cut again to 2 per cent and reduced the repo rate to 5.25 per cent.

Two things have moved since. Brent crude is above $100 a barrel, which feeds through to transport, freight and anything made from petrochemicals. And core inflation, which strips out food and fuel and is the better measure of whether price pressure is becoming entrenched, has risen to 4.2 per cent.

Headline inflation at 4.8 per cent is still inside the band. The committee has acted before it was breached rather than after, which is what a forecast-based framework is supposed to do, and it has paid for that pre-emption by surprising the bond market.

For businesses the stance matters more than the quarter point.

Neutral meant the next move could go either way, which let treasurers and boards plan on the assumption that money would not get dearer. Calibrated tightening removes that. Malhotra's formulation, that the next move is a hike or a pause, tells anyone refinancing in the next year to budget for a higher cost of funds rather than a lower one.

That lands on specific borrowers. Non-bank lenders fund themselves largely through bank term loans and bonds, and their spreads are the difference between what they borrow at and what they lend at. Several of the lenders whose accounts have been filed this season already showed finance costs growing faster than interest income. Auxilo's rose 36 per cent against interest income up 28, compressing net interest income growth to about 15 per cent. A tightening cycle makes that arithmetic harder, not easier.

Capital-raising plans face the same shift. Ola Electric is raising ₹1,000 crore partly to repay debt, and the Cabinet has just approved a ₹10,000 crore fund to put equity into SMEs precisely because growth-stage debt is poorly suited to long-payback expansion. Both decisions look better in a tightening cycle than they did in a falling one.

For the IPO pipeline the read is less direct but real. Higher rates raise the return available without taking equity risk, which usually tightens what public investors will pay for growth. Companies that pulled forward a listing into a friendly window, and there have been many this quarter, chose well.

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