RBI Hikes Repo Rate by 25 bps; Rules Out Near-Term Cut
The RBI has raised the repo rate to 5.50% and ruled out immediate rate cuts, focusing on inflation risks and economic growth.
The Reserve Bank of India (RBI) has raised the policy repo rate by 25 basis points (bps) to 5.50 per cent, signaling a decisive move to combat inflation. During the announcement on Wednesday, RBI Governor Sanjay Malhotra revealed that the Monetary Policy Committee (MPC) had even deliberated a more aggressive 50 bps hike before settling on the current increase. The central bank has also shifted its policy stance, indicating that future moves will depend on evolving growth and inflation dynamics.
No Immediate Relief for Borrowers
For those hoping for a reduction in interest rates, the news may be disappointing. Governor Malhotra was explicit in his communication regarding the future trajectory of monetary policy, stating that the central bank does not see a rate cut as an option in the immediate future.
"We have clarified by changing the stance that there is no rate cut in the near term. What we are contemplating is either a pause or a rate hike," Malhotra stated during the post-policy conference in Mumbai. He emphasized that the depth of any future hikes—whether shallow or deep—will be dictated by the macroeconomic environment and the interplay between growth and inflation.
Inflation Concerns and GDP Projections
The RBI's cautious stance is driven by persistent inflationary pressures. The central bank projects headline CPI inflation to average nearly 5.8 per cent over the next three quarters. To manage these risks, the Governor noted that the MPC will look beyond just headline inflation, assessing core inflation, underlying inflation, and diffusion indices to ensure price pressures are not becoming broad-based.
On the growth front, there is a positive outlook. The RBI has raised its real GDP growth projection for FY27 to 7.1 per cent. This resilient economic activity provides the MPC with the necessary breathing room to prioritize the fight against inflation without jeopardizing national economic momentum.
Liquidity Outlook: FCNR(B) Deposits and Market Surplus
The current banking landscape is characterized by a significant liquidity surplus, largely driven by large inflows of Foreign Currency Non-Resident (FCNR(B)) deposits. While these funds are being utilized to support high credit growth, the Governor cautioned that banks should not rush into deployment.
"We are already seeing a use of the FCNR(B) deposits, as evidenced by the high growth rate. But of course, the amount is so large, we do not want them to use them overnight. They need to do their due diligence properly and take their time," Malhotra advised.
Despite the current cushion, the RBI expects this surplus liquidity to drain naturally. The Governor anticipates that a significant portion of this liquidity—potentially around three to four lakh crore rupees—will be absorbed through natural mechanisms and RBI-led interventions within the current financial year.
Impact on Banking and Future Meetings
The RBI's dual-track situation—tightening monetary policy amidst a liquidity surplus—presents a complex environment for lenders. This surplus may influence how quickly banks transmit repo-rate hikes to deposit rates, especially as some major lenders have signaled they may delay raising deposit rates due to the abundance of FCNR(B) funds.
The next critical milestone for the MPC is the upcoming meeting scheduled for December 2-4. Meanwhile, the detailed minutes of the October meeting are expected to be released on October 21.