The Reserve Bank of India has responded to rising inflationary pressures by raising the policy repo rate by 25 basis points to 5.50 percent, its first increase since February 2023. The Monetary Policy Committee voted unanimously for the rate action and, by a 4-2 majority, changed its stance from “neutral” to “calibrated tightening.”
The change in stance is more significant than the rate increase alone. It signals a clear turn in the monetary-policy cycle, with rate cuts effectively off the table in the near term. However, future policy decisions are likely to be determined by the evolution of inflation, global financial conditions and domestic growth.
The policy action reflects a material change in the inflation outlook. Headline CPI inflation rose to 4.82 percent in August from 4.45 percent in July, while core inflation increased to 4.2 percent. Price pressures have also become more broad-based, with food and fuel inflation accompanied by signs of higher input costs passing through to a wider range of goods and services.
Near-term inflation risks remain tilted to the upside amid elevated energy prices, unfavourable weather conditions and continuing global uncertainty. The RBI has consequently raised its FY2027 inflation projection to 5.2 percent from 5.0 percent in August policy. The rate increase is aimed at preventing these supply-side pressures from becoming embedded in inflation expectations and broader pricing behaviour.
At the same time, domestic growth remains resilient, giving the MPC room to prioritise price stability. The RBI raised its FY2027 growth forecast to 7.1 percent from 6.7 percent in August policy, supported by sustained momentum in domestic economic activity. The combination of strong growth and rising inflation provides an appropriate backdrop for a measured tightening of monetary conditions.