Winning Bizness Desk

Mumbai.The Reserve Bank of India (RBI) has raised the repo rate to 5.50% from 5.25%, making borrowing more expensive as inflationary pressures intensify. The move could increase equated monthly instalments (EMIs) on existing loans and push up the cost of fresh borrowing, potentially affecting consumer spending during the festive season.

The RBI announced the decision on October 7 after a three-day meeting of its Monetary Policy Committee (MPC), chaired by Governor Sanjay Malhotra.

The central bank has also raised its inflation forecast for 2026-27 to 5.2% from 5%, signalling that price pressures remain a key concern. However, it has upgraded its economic growth projection for the financial year to 7.1% from 6.7%.

RBI shifts focus towards controlling inflation

The RBI has changed its monetary policy stance to “calibrated tightening”, indicating a tougher approach towards inflation. The shift reduces the likelihood of interest rate cuts in the near term. The central bank may keep rates unchanged in upcoming meetings or raise them further if inflationary pressures persist.

The repo rate is the interest rate at which commercial banks borrow money from the RBI. When this rate rises, banks face higher borrowing costs and may pass them on to customers through higher lending rates. The policy aims to moderate demand by making borrowing more expensive, thereby helping contain inflation.

Economists flag possibility of further rate hikes

Market experts have highlighted the change in policy stance as a significant signal from the central bank.

• Ajit Mishra of Religare Broking said the 0.25 percentage point increase was expected, but the change in stance was more important, indicating that controlling inflation had become the RBI’s top priority.
• Upasana Bhardwaj, chief economist at Kotak Mahindra Bank, said interest rates could rise by another 0.25 to 0.50 percentage points in the coming period.
• Radhika Rao, senior economist at DBS Bank, said the move reflected the RBI’s determination to address inflation risks before they develop into a larger economic problem.

GDP growth forecast raised to 7.1%

Despite inflation concerns, the RBI has expressed greater confidence in India’s growth outlook. It has raised its gross domestic product (GDP) growth forecast for 2026-27 to 7.1% from 6.7%.

The quarterly projections are:

• Second quarter (Q2): 7.2%
• Third quarter (Q3): 6.9%
• Fourth quarter (Q4): 6.8%, unchanged from the earlier estimate.

The revised annual projection indicates that the central bank expects the economy to maintain strong growth even as monetary policy becomes tighter.

Why the RBI decided to raise interest rates

Governor Sanjay Malhotra cited rising crude oil prices, global pressures and the risk of higher food inflation due to adverse weather conditions as key concerns. The RBI wants to contain inflation before it becomes more entrenched while maintaining economic stability. Higher borrowing costs are intended to moderate spending and demand, helping ease pressure on prices.

Existing borrowers may face higher EMIs

The rate increase could affect a large number of borrowers because nearly seven out of 10 loan customers have interest rates linked to the repo rate. Customers with floating-rate home, car and personal loans may see their borrowing costs rise as banks revise their lending rates.

The impact will depend on the terms of individual loans and the timing of rate resets.

• Existing borrowers: EMIs may increase, or banks may extend the repayment period, depending on the loan arrangement.
• New borrowers: Home and car loans could become more expensive once banks revise their rates.
• Loan eligibility: Applicants may qualify for a smaller loan if higher interest costs reduce their repayment capacity.

Festive shopping could face pressure

Higher borrowing costs could influence household spending during the festive season. Customers facing larger EMIs may have less money available for discretionary purchases, including consumer durables and vehicles.

Fresh borrowers could also postpone purchases if loan repayments become more expensive. However, the actual effect on festive demand will depend on household incomes, consumer confidence and the extent to which banks pass on the rate increase.

When could the RBI cut rates again?

The possibility of a rate cut will depend largely on the inflation outlook and broader economic conditions. If inflation remains under control and economic circumstances permit, the RBI could consider lowering rates in the future.

The MPC reviews inflation, economic growth and domestic and global developments at every policy meeting before deciding on interest rates. For now, the shift towards calibrated tightening suggests that controlling price pressures will take precedence over easing borrowing costs.

How the repo rate system evolved over time

The repo system originated in the United States in 1917, during the First World War, when banks faced financial pressures and difficulties obtaining funds. The US Federal Reserve introduced the mechanism to facilitate access to money and ease the burden on banks.

Over time, the system evolved in several ways:

• Eligible participants: The facility initially served selected member banks. Primary dealers were included in the 1950s, and both banks and dealers now use repo transactions.
• Interest rate mechanism: Repo arrangements initially operated through fixed discount rates, before becoming more closely linked to market rates.
• Collateral: Government and war bonds were among the original securities used as collateral. Treasury securities and, later, mortgage-related securities expanded the range of eligible assets.
• Modern role: Repo transactions have become an important tool for managing liquidity and the flow of money through banking systems worldwide, including India.

The repo rate remains a key instrument of monetary policy, influencing borrowing costs, spending and inflation across the economy.