Going into the October monetary policy, markets were increasingly leaning towards a rate hike as inflation risks continued to build since the August review. Escalating geopolitical tensions in West Asia, a sharp rise in crude oil prices and higher global interest rates had materially altered the macroeconomic backdrop. With major central banks, including the US Federal Reserve and the Bank of Japan, having tightened policy in recent months, the debate had shifted from whether the RBI would act to whether it would choose to act now or wait for additional data.
The Monetary Policy Committee (MPC) ultimately delivered a 25bps increase in the repo rate to 5.50 percent and shifted the policy stance from Neutral to Calibrated Tightening. While the decision may not have come as a complete surprise, it reflects the RBI's assessment that inflation risks have become more persistent and that maintaining the previous policy setting was no longer appropriate.
The global environment has become significantly more challenging since the August meeting. Higher commodity prices, elevated geopolitical uncertainty and tighter global financial conditions continue to cloud the growth-inflation outlook. Rising global bond yields and a stronger US dollar have also contributed to a more restrictive external environment for emerging markets.
Despite these headwinds, the domestic economy continues to remain resilient. Economic activity has been supported by healthy consumption, robust investment spending and steady external demand. Strong Q1FY27 growth and supportive high-frequency indicators have reinforced confidence in the economy's ability to absorb a modest tightening in financial conditions. Reflecting this strength, the RBI has revised its FY27 GDP growth forecast upwards, indicating that growth concerns are no longer the dominant factor guiding policy decisions.
The inflation outlook, however, has deteriorated. Headline inflation has moved higher, driven initially by food and fuel prices, but the RBI has highlighted signs that price pressures are becoming more broad-based. The persistence of elevated food inflation, higher energy costs and increasing input prices has raised concerns regarding second-round effects and inflation expectations.