RBI Turns Cautious, Raises Repo Rate to 5.50 pc Amid Inflation and Global Uncertainty

RBI Turns Cautious, Raises Repo Rate to 5.50 pc Amid Inflation and Global Uncertainty

New Delhi, Oct 7: The Reserve Bank of India (RBI) has increased the benchmark repo rate by 25 basis points to 5.50 per cent, taking a cautious approach as rising inflation, higher crude oil prices and growing global economic risks put pressure on the domestic economy.

The decision was announced on Wednesday after a three-day meeting of the six-member Monetary Policy Committee (MPC), chaired by RBI Governor Sanjay Malhotra.

Along with the repo rate hike, the RBI raised the Standing Deposit Facility (SDF) rate to 5.25 per cent, while the Marginal Standing Facility (MSF) rate and bank rate were adjusted to 5.75 per cent.

The rate increase comes after the central bank had maintained the repo rate at 5.25 per cent for an extended period. It also marks the first increase in the repo rate since February 2023, reflecting a shift in the policy environment as inflationary pressures have become more pronounced.

Inflation has been one of the key factors behind the RBI’s decision. India’s Consumer Price Index (CPI) inflation rose to 4.82 per cent in August from 4.45 per cent in July, bringing price pressures closer to the upper end of the RBI’s tolerance band.

The global environment has also become more challenging. Crude oil prices have moved above $100 a barrel, partly due to escalating tensions in West Asia. A sustained rise in oil prices could increase input, transportation and energy costs across several sectors and add to inflationary pressures.

Global bond yields and inflation trends have further complicated the policy outlook. With several major economies facing renewed price pressures, the room for central banks to maintain easier monetary conditions has narrowed.

Domestic food inflation remains another area of concern. Strong El Nino conditions and below-normal rainfall in October could affect Rabi crop production, potentially creating additional pressure on food prices in the coming months.

SBI Research had earlier indicated that the balance of risks favoured a 25-basis-point rate increase, citing broader inflationary pressures, changing global macroeconomic conditions, liquidity developments and renewed repricing of risks in financial markets.

The RBI’s latest decision underlines its priority of containing inflation while keeping a close watch on growth and financial stability. Borrowers, banks, businesses and investors will now track upcoming policy meetings for further signals on interest rates and liquidity conditions.

The repo rate hike could have implications for borrowing costs across the economy, particularly for loans linked to external benchmarks, while also influencing deposit rates and financial market sentiment.