RBI raises repo rate to 5.5%, first hike since 2023

The Reserve Bank of India (RBI) recently completed its easing cycle by raising its policy rate for the first time since 2023. The repo rate increased by 25 basis points, reaching 5.50 per cent from 5.25 per cent on October 7. The central bank also shifted its policy stance from neutral to calibrated tightening. All six members of the rate panel unanimously approved the rate hike.

The standing deposit facility rate is now 5.25 per cent, while the marginal standing facility rate and the bank rate have risen to 5.75 per cent. This marks the first hike in three years, following six consecutive rate increases totalling 250 basis points that began in May 2022. The last tightening occurred in February 2023.

RBI Governor Sanjay Malhotra cited a sudden re-escalation of the West Asia conflict in September, along with a sharp rise in crude prices, as factors influencing the decision. He expects global inflation to rise steeply, with major central banks already tightening their policies. The Indian inflation situation shows strain, with CPI inflation projected at 5.2 per cent this year, reaching 4.9 per cent in the second quarter, 6 per cent in the third, and 5.7 per cent in the fourth quarter.

Core inflation is estimated at 4.4 per cent, indicating that price pressure has now extended to food commodities, not just oil.

The Monetary Policy Committee (MPC) noted that policy works primarily by curbing second-round effects. Credit growth remains robust, and banks and non-banking lenders are in sound shape. However, India's merchandise trade deficit widened to $58.7 billion (Dh215.6 billion) in July and August, up from $55.1 billion (Dh202.4 billion) a year earlier.

Malhotra stated that the RBI will allow orderly exchange rate adjustments while curbing excessive volatility. The implications for Indian Fixed Deposit (FD) holders in the UAE include potential benefits for non-resident Indians with rupee deposits. Banks in India often raise deposit rates following a policy hike, although the pace varies.