New Delhi [India], October 7 (ANI): The Reserve Bank of India’s decision to raise the repo rate by 25 basis points to 5.50 per cent and shift its monetary policy stance to calibrated tightening has made the central bank more hawkish, but economists expect the current rate-hike cycle to remain shallow.
The RBI’s move comes amid heightened inflationary pressures arising from the ongoing West Asia conflict. At the same time, the central bank raised its FY27 real GDP growth forecast to 7.1 per cent, pointing to continued strength in economic activity and credit demand.
Banking leaders and economists said the latest policy action is aimed at containing inflation while maintaining economic stability. However, they differed on how far the RBI may need to go with further rate increases.
Rajani Sinha, Chief Economist at CareEdge Ratings, said the current tightening cycle could remain shallow, pointing to the RBI’s past experience with the calibrated tightening stance.
“Interestingly, the ‘calibrated tightening’ stance was last adopted by the MPC in October 2018 and was subsequently changed to ‘neutral’ in February 2019, alongside a 25-bps rate cut that marked the beginning of a policy-easing cycle,” Sinha said.
She noted that despite the calibrated tightening stance in October 2018, the RBI did not undertake another rate hike at that time. Based on this historical precedent and the expected moderation in headline inflation from Q4 FY27 onwards, CareEdge expects the current hiking cycle to remain shallow, with scope for another 25-50 bps of rate hikes.
Sinha also said policy tightening could support the rupee, particularly as major global central banks are also raising rates. She added that liquidity management would remain important and that rate hikes without corresponding liquidity tightening could prove less effective.
The RBI’s shift in stance has also changed expectations around the direction of interest rates.
Ajay Kumar Srivastava, Managing Director and CEO of Indian Overseas Bank, said the move signals that rate cuts are not likely in the near term.
“The shift to a calibrated tightening stance is equally significant, signalling that rate cuts are off the table for now and that further policy action will depend on how growth and underlying inflation evolve,” Srivastava said.
He added that higher rates would have implications for borrowers, particularly home loan customers and small businesses, while banks would need to balance higher-rate transmission with continued support for productive credit demand.
Radhika Rao, Senior Economist and Executive Director at DBS Bank, said the October rate hike reflected the RBI’s assessment that cyclical inflation risks were no longer benign.
She said, “The change in stance also underscores the RBI MPC’s hawkish intent and is reinforced by upward revisions to growth and inflation forecasts. Liquidity normalisation is necessary to keep the call rate anchored to the repo rate, thereby strengthening policy transmission. The combination of higher inflation forecasts and calibrated tightening should keep front-end rates biased higher”.
Dipti Deshpande, Senior Director and Principal Economist at Crisil, meanwhile, sees room for another 25 basis point rate hike in December.
She said, “We see room for another rate hike of 25 basis points in December. Even with higher interest rates, we expect bank credit growth to rise 14.5-15.5 per cent this fiscal year, reflecting resilient credit demand and improving economic activity”.
Banking sector executives also said the higher rates should not be viewed in isolation from the stronger growth outlook.
Brajesh Kumar Singh, MD and CEO of Canara Bank, welcomed the RBI’s calibrated policy response, saying the 25 bps repo rate hike to 5.50 per cent comes amid heightened inflationary pressures from the West Asia conflict.
“This move is aimed at anchoring inflation expectations while maintaining macroeconomic stability. Although the increase in the repo rate will play some part in affecting funding costs and interest rates, the upward revision of FY27 real GDP growth to 7.1 per cent reflects good growth momentum and healthy credit demand, making for a conducive environment for the banking system,” Singh said.
Overall, the reactions suggest that while the RBI has moved firmly towards a tighter policy stance, economists do not expect an aggressive or prolonged rate-hike cycle. The focus will now remain on how inflation evolves, how quickly price pressures broaden and whether strong economic and credit growth continues despite higher borrowing costs. (ANI)
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