RBI rate hike: What it means for loans, deposits and markets

Summary

The Reserve Bank of India (RBI) opts for a precautionary rate hike to curb demand as inflation is set to inch up.

In the run-up to the Reserve Bank of India’s (RBI) monetary policy review, there was widespread expectation that the interest rate hike cycle would begin. Inflation is inching up and is likely to move up further. Globally, central banks are raising interest rates and bond yields are at multi-decade highs.

The RBI did the expected. The Monetary Policy Committee (MPC) hiked repo rate by 25 basis points (0.25%) to 5.50%. The repo rate is the rate at which the RBI lends money to banks. This rate is the pivot for interest rates across the system. By raising the repo rate, the RBI has signalled that bank deposit and lending rates should move up.

Apart from the rate decision, the RBI also signals its stance on the future course of monetary policy. This stance was changed from neutral to ‘calibrated tightening’. It was mentioned that ‘policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook’. This means the RBI could raise rates further depending on the inflation outlook.

The RBI raised its inflation projection for 2026-27 to an average of 5.2% in the latest review, from 5% projected in its 5 August policy review. The encouraging part on growth was that the RBI raised its GDP growth projection for 2026-27 to an average of 7.1%, from 6.7% projected in August. This is a substantial rise. India's GDP grew at an unexpected 7.8% pace during the April-June quarter (Q1). Economists are now revising their growth projections upwards.

What lies ahead

To state the obvious, further rate hikes lie ahead. The question is the extent of those hikes. Given that the projected inflation for 2026-27 is 5.2%, and that for April-June 2027 is 5.6%, at least another rate hike of 25 basis points is due, probably in the next review on 4 December 2026. The rationale is that inflation is expected to average 6% in the October-December quarter, touching the upper end of the RBI’s 2-6% target range. Thereafter, RBI may either hit a pause or hike one last time after December, depending on how inflation pans out. Post December, inflation is expected to moderate, averaging 5.7% in January-March 2027 and 5.6% in April to June 2027.