RBI rate hike: What lies ahead for the economy

Summary

More rate hikes are coming. The question is how much

In the run-up to the policy review, there was widespread expectation that the interest rate hike cycle would be set in motion. Inflation is inching up and will move up further. Globally, central banks are hiking interest rates, and bond yields are at multi-decade highs.

The Reserve Bank of India (RBI) did the expected. The monetary policy committee (MPC) hiked the repo rate by 25 basis points (0.25%) from 5.25 to 5.50%. The repo rate is the rate at which RBI lends funds to banks, if and when required. This rate is the pivot for interest rates across the system. By raising the repo rate, the central bank signalled that bank deposit and lending rates should rise.

Apart from the rate hike, there is a stance on future monetary policy formulation. 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', i.e., depending on inflation, they would execute further rate hikes.

On inflation, RBI's earlier view, communicated during the policy review on 5 August, was an average of 5% for fiscal year 2026-27. In this review, the projection was revised upward to average 5.2% over the year. The encouraging part from a growth perspective was that the gross domestic product (GDP) growth projection for FY27, which was 6.7% at the previous review meeting on 5 August, has been revised upward to an average of7.1% over the year.

This is substantial. Our GDP growth rate in the first quarter, April to June 2026, at 7.8%, was a positive surprise. Economists are now resetting growth projections higher.

What lies ahead

To state the obvious, further rate hikes lie ahead. The question is the extent of those hikes. It has been mentioned that it depends on how inflation pans out. Given that projected inflation for FY27 is 5.2% and for the June quarter is 5.6%, at least another 25bp rate hike is due, probably in the next review on 4 December 2026.