RBI Raises Repo Rate by 25 Bps to 5.50% in First Hike Since 2023
- 7th October 2026
- 11:00 AM
- 5 min read
Summary
The Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 5.50% in Mumbai on 7 October 2026, its first hike since February 2023. The Monetary Policy Committee (MPC) voted unanimously and changed its stance to calibrated tightening as consumer inflation stayed above the 4% target.Mumbai | 7 October 2026
The repo rate is the interest rate at which the RBI lends money to banks. On Wednesday, the RBI raised this rate by 25 basis points (bps), from 5.25% to 5.50%. The hike comes amid rising inflation, higher oil prices and a weaker rupee.
What Is a Basis Point and How Big Is This Hike?
A basis point is one hundredth of a percentage point, so 100 bps equal 1 percentage point. A 25-bps hike lifts the repo rate by 0.25 percentage points. All six members of the MPC, headed by Governor Sanjay Malhotra, voted for the increase.
Why Did the RBI Raise Rates Now?
Inflation measured by the Consumer Price Index (CPI) rose to 4.82% in August, above the RBI’s 4% target for a third straight month. Higher oil prices linked to the Iran war and weak monsoon rains linked to El Niño added to the pressure. Nearly half of the consumer basket now shows inflation above 4%.
“It is clear that inflation and its outlook are not benign as they were last year,” Malhotra said.
Strong growth gave the RBI room to act. Gross domestic product (GDP) grew 7.8% in the April to June quarter, above the RBI’s forecast of 7%.
| Projection for the current financial year | Earlier | Now |
| Inflation | 5% | 5.2% |
| Core inflation | 4.3% | 4.4% |
| GDP growth | 6.7% | 7.1% |
How Strong Is India’s Growth Outlook?
“The Indian economy has been strong, and economic momentum remains broad based,” Malhotra said. The RBI said economic activity kept its momentum in the July to September quarter.
- Manufacturing: Activity held up despite cost pressures.
- Services: The sector remained steady and broad-based.
- Investment: Fixed investment stayed strong.
- Exports: Net exports stayed positive.
- Weak spots: The RBI flagged weakness in non-durable goods and domestic air traffic.
The RBI expects private consumption and investment to remain the main drivers of growth, with rural and urban demand staying steady.
What Does Calibrated Tightening Mean?
The RBI changed its policy stance from neutral to calibrated tightening, the first change of this kind since 2018. A neutral stance keeps the option to raise or cut rates open. A tightening stance means the RBI leans towards higher rates to control inflation.
“Rate cuts are off the table in the near term,” Malhotra said.
How Does a Repo Rate Hike Affect Loans and Savings?
When the RBI charges banks more to borrow, banks often pass the higher cost on to customers.
- Borrowers: Rates on home, car and personal loans can rise, which can increase equated monthly instalments (EMIs).
- Savers: Banks may raise interest rates on fixed deposits.
- Businesses: Loans for expansion and daily operations can cost more.
- Liquidity: Higher rates can reduce the spare cash in the banking system.
What Is the RBI Doing About Surplus Cash in Banks?
Schemes to draw dollars and support the rupee brought in close to $144 billion as of mid-September. These dollars, swapped with the RBI, added a large amount of cash to banks. Surplus cash peaked at a record ₹11.16 trillion at the start of September.
The RBI has so far used bond sales and longer-term foreign exchange swaps to drain this cash. On Wednesday, it announced no extra steps, such as a hike in the reserve ratio, the share of deposits banks must set aside. “The Reserve Bank will use an appropriate mix of liquidity management tools,” Malhotra said.
How Do Interest Rates Affect the Stock Market?
Higher rates raise borrowing costs for companies and consumers, so sectors that rely on loans often respond first.
- Banks and non-banking financial companies (NBFCs): Rates affect their cost of funds and demand for loans.
- Real estate: Home purchases are often financed with loans.
- Automobiles: Many vehicle purchases are financed.
Bond yields, the rupee and market sentiment can also move after a policy change.
On 7 October, the Nifty 50, an index of 50 large companies listed on the National Stock Exchange (NSE), was down 0.3% in morning trade but recovered from the day’s lows. The Nifty Bank index, which tracks banking stocks, rose 0.15% after falling 0.7% earlier, as bank stocks gained from the absence of extra liquidity steps. The 10-year government bond yield was slightly higher at 7.2269%, and the rupee held near its previous close at 96.43 to the US dollar.
Outlook
Malhotra said the extent and timing of any further hikes will depend on actual inflation and growth outcomes. “Headline CPI inflation is expected to average almost 5.8% in the next three quarters,” he said.
On global risks, Malhotra said, “Global inflation is expected to rise. Trade uncertainty continues to linger. Global sentiment remains fragile. The impact of the Iran war could also disrupt trade and supply chains.”
The RBI flagged a weak monsoon and a possible El Niño event as risks to the rabi (winter crop) season, and said supply chain disruptions could weigh on growth.
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