Mumbai: The Reserve Bank of India raised its key lending rate by 25 basis points to 5.50 per cent, signalling a tougher fight against inflation even as it lifted India’s economic growth forecast for 2026-27 to 7.1 per cent.
The Monetary Policy Committee unanimously backed the increase after its October 5-7 meeting and shifted its stance to calibrated tightening. The RBI made clear that rate cuts are off the table in the near term, leaving future decisions between another increase and a pause.
The decision comes as renewed conflict in West Asia drives up energy costs, while uneven rainfall and rising food prices threaten to spread inflation across the economy.
Growth outlook strengthens
The RBI raised its annual GDP growth projection by 40 basis points, reflecting stronger economic activity despite global pressures. India’s economy expanded 7.8 per cent in the first quarter, supported by private consumption, investment and a positive contribution from net exports.
Growth is projected at 7.2 per cent in the second quarter, 6.9 per cent in the third and 6.8 per cent in the fourth. The forecast for the first quarter of 2027-28 stands at 7.1 per cent.
Infrastructure spending, recovering private investment and strong credit flows should support activity. However, a weak monsoon, supply disruptions and tighter global financial conditions could weigh on demand.
Food and fuel push prices higher
Retail inflation rose to 4.8 per cent in August from 4.5 per cent in July, driven largely by food and fuel. Price increases became more widespread, with sharp rises in items including sugar and onions.
Core inflation, which excludes food and fuel, climbed to 4.2 per cent after staying at 3.9 per cent for three months.
The RBI projected inflation at 5.2 per cent for 2026-27, with quarterly readings of 4.9 per cent, 6 per cent and 5.7 per cent over the remaining three quarters. Inflation is expected at 5.6 per cent in the first quarter of 2027-28.
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The central bank flagged early signs of broader price pressures, although evidence of supply shocks becoming embedded in business pricing remained limited.
Surplus liquidity supports credit
Banking system liquidity averaged a daily surplus of Rs 5.9 lakh crore since the August policy meeting, helped by measures to attract capital inflows.
Liquidity absorption measures and advance tax payments reduced the surplus in September. Abundant funds softened short-term borrowing rates, while government bond yields rose amid higher oil prices, global yields and geopolitical tensions.
The RBI said it would use liquidity tools to bring the overnight call money rate closer to the repo rate.
Credit growth remained strong across sectors. Banks continued to show healthy capital, liquidity, asset quality and profitability, while non-banking financial companies also remained sound. Future policy moves will depend on growth, underlying inflation and whether price pressures spread further domestically.
