A new rate game begins. What’s inside the RBI’s new playbook?
RBI rate hike in October monetary policy marks a sharp shift to calibrated tightening, raising the repo rate to 5.5%. RBI Governor Sanjay Malhotra is prioritising inflation risks as crude oil, food prices and inflation expectations rise. Strong FY27 GDP growth at 7.1%, rapid credit growth and tighter liquidity give RBI room to act before supply shocks spread across markets.
The Reserve Bank of India (RBI) has initiated a new rate strategy, diverging from the easing cycle that started last year. The bank raised the repo rate by 25 basis points to 5.5%, marking a significant shift from a neutral stance to "calibrated tightening." RBI Governor Sanjay Malhotra emphasized the need to address inflation risks before they embed themselves in inflation expectations, corporate pricing, and credit conditions.
Inflation has been driven by rising food and energy prices due to factors like deficient monsoon, El Niño, and increased crude prices amid the West Asia conflict. While the RBI cannot directly influence food production or global oil prices, it can prevent these shocks from spreading throughout the economy. The central bank's move comes as it has become more confident about India's strong growth prospects, with its GDP growth forecast for FY27 raised to 7.1% from 6.7%.
The recent quarter saw the economy grow at 7.8%. The resilience in consumption, investment, and services sectors has given the RBI more room to focus on inflation. The RBI is also closely monitoring credit growth, which has increased to 18.1% year-on-year as of September 15, indicating that demand-side pressures remain limited. The decision to tighten monetary policy now rather than wait for clear signs of demand-led inflation highlights the RBI's commitment to preventing inflation from becoming persistent.
Written by urgent.news from The Economic Times - Economy's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
