The RBI's Monetary Policy Committee met from October 5 to 7 in a tougher environment than in August. Crude oil had risen above $100 a barrel, and the rupee was under pressure, opening at 96.42 against the US dollar on the day of the decision. Headline inflation rose to 4.82 percent in August, its highest level since December 2024, while core inflation rose to 4.31 percent, showing that price pressures had spread beyond food.
The weather added to the risk, as the 2026 monsoon ended 12.6 percent below normal, the weakest in more than a decade, amid El Niño conditions. Globally, several major central banks had tightened policy and US yields were rising. After four straight meetings with the repo rate at 5.25 percent, markets had moved from expecting a hold to expecting a 25-bps hike.
The MPC voted unanimously to raise the repo rate by 25 bps to 5.50 percent and, by a 4–2 majority, changed its stance to calibrated tightening. The Governor said it means that rate cuts are off the table and future decision would be either a hike or a pause.
The RBI raised its FY27 GDP growth forecast to 7.1 percent and its inflation forecast to 5.2 percent from 5.0 percent. Core inflation is now projected at 4.4 percent against 4.3 percent earlier. In simple terms, growth looks stronger, and inflation is also higher. The Governor said how long and how far the RBI hikes will depend on growth and inflation trends, especially underlying inflation, how widely price pressures spread, and the second-round effects of the supply shock, both from energy and monsoon related risks.
On liquidity, the Governor said the RBI will use appropriate tools to keep the overnight rate in line with the policy rate, but no specific measures were announced within the policy. Later in the press conference, the Governor indicated that a hike in CRR (cash reserve ratio) is the least preferred tool though not ruled out. This implies tools like Variable rate reverse repos (VRRR), sell/buy swaps and Open Market Operations would continue to be deployed to absorb surplus liquidity.