RBI HIKES REPO RATES BY 25-BPS, AS EXPECTED

RBI HIKES REPO RATES BY 25-BPS, AS EXPECTED

Even before the 3-day RBI-MPC meet commenced on 05-October, the markets had already agreed that the RBI will hike repo rates by 25 bps. There were also outside expectations of a 50-bps rate hike. There were several triggers for the rate hike. High inflation, weak rupee, volatile crude prices, monsoon deficit, and rising bond yields all hinted at a 25-bps rate hike by the RBI MPC at the bare minimum.

The decision of the RBI to also change the monetary stance from “Neutral” to “Calibrated Tightening” was something we had highlighted in our pre-policy note. It avoids the risk of ignoring inflation and also ensures that the impact on growth and consumption is limited. Interestingly, 2 MPC members (Dr Nagesh Kumar and Prof Ram Singh) dissented to the change in stance. The decision to hike repo rates by 25 bps was unanimous.

KEY HIGHLIGHTS OF THE OCTOBER 2026 MONETARY POLICY

Here are some of the key takeaways from the October 2026 policy statement.

RBI raised repo rates by 25 bps from 5.25% to 5.50%. All 6 members of the MPC voted unanimously to raise the rates by 25 bps to curtail inflation.

This raises the SDF (reverse repo) at 5.25%, while the bank rate and marginal standing facility (MSF) rate now stand increased to 5.75%. Both are repo-linked rates.

The monetary stance was shifted from “Neutral” to “Calibrated Tightening” to underline that rate cuts were ruled. Only 4 out of 6 MPC members voted in favour of stance shift.

The GDP growth estimate for FY27 has been raised by 40 basis points from 6.7% to 7.1% due to strong Q1FY27 GDP growth numbers and robust signals from industrial activity.

Inflation forecast for FY27 was raised by 20 bps from 5.0% to 5.2% as core inflation spiked to 4.2%, and even core inflation (ex-precious metals) was up at 2.9%.

The deluge of liquidity post the FCNR(B) dollar swap has been partially absorbed by the VRRRs and OMOs as well as advance tax payouts. Average daily surplus since the August policy has been around ₹5.9 trillion. Operation Twist will manage the yield spreads.

Let us turn to the inflation and growth forecasts for FY27.

MPC RAISES FY27 INFLATION ESTIMATE BY 20 BPS TO 5.2%

The 10-bps cut in inflation in the August policy was more of a tempering after a series of upward revisions. However, in the October policy, the inflation projection for FY27 was again raised by 20 bps. While fuel and food inflation have been the real drivers, core inflation has also shown pressure at around 4.2%. With the rupee weak, imported inflation is likely to take the headline inflation close to the range of 5.8%-6.0% in Q3 and Q4 of FY27.

With the continuing turmoil in the Middle East and oil SPRs at record lows, oil prices may take some time to normalize. On the agricultural output front, while Kharif may be at par with last year, the real damage could be seen in Rabi output. It is expected that headline inflation may touch 6.0% before moderating. The 5.2% projected CPI inflation for FY27 will have a quarterly distribution as under: Q2FY27 (4.9%), Q3FY27 (6.0%), Q4FY27 (5.7), and Q1FY28 (5.6%). There have been upward revisions across the next four quarters.

RBI MPC RAISES FY27 REAL GDP GROWTH BY 40 BPS TO 7.1%

For FY27, the real GDP growth estimate has been raised by 40 basis points to 7.1%. That was always on the cards after the Q1FY27 GDP growth came in much better than expected at 7.8%. Domestic demand has been resilient, so the global supply chain constraints have had little impact on the overall manufacturing growth. While agriculture has been under pressure; both manufacturing and services have shown better-than-expected performance. Markets do not see much more upsides to energy prices from here.

The upgrade to real GDP is a bet on strong domestic growth, consumer demand, and a positive surprise from exports. India has also contained the adverse impact of the Gulf conflict by diversifying its fuel sources. The weal rupee is also expected to buoy exports in the coming months. For FY27, the 7.1% GDP growth has been broken up quarter-wise as under: Q2FY27 (7.2%), Q3FY27 (6.9%), Q4FY27 (6.8%), and Q1FY28 (7.1%). GDP recovery is likely to be back-ended in this case.

RBI SURPRISES WITH A CHANGE IN STANCE TO “CALIBRATED TIGHTENING”

Apart from a 25-bps rate hike, the RBI also changed the stance of the policy from “Neutral” to “Calibrated Tightening.” Here are 5 things to know.

A policy stance bridges the gap between the current action and the future expectation. Calibrated tightening is a clear indication that rate cuts are off the table for now.

A 50-bps rate hike or even a “Tightening” stance would look too hawkish. Instead, calibrated tightening shows that growth will not be compromised.

The shift in stance highlights that the RBI will continue to focus primarily on inflation, till it comes closer to the eventual inflation target of 4.0%.

The change in stance was not consensual, considering that Dr Nagesh Kumar and Prof Ram Singh dissented with the idea of changing the stance.

The change in stance also opens the doors for another 25-bps rate hike in December policy, although the trajectory beyond that is not too clear.

The change in stance to calibrated tightening (as we had hinted in our pre-policy report) was an important message sent out to the markets by the RBI MPC.

DEVELOPMENT AND REGULATORY POLICIES ANNOUNCED

Here is a gist of some of the key development and regulatory policies announced by the RBI, outside the ambit of the monetary policy.

There is a move to enhance customer convenience via the account aggregator framework. RBI will implement inter-operability among NBFC account aggregators so access and sharing of financial information becomes simple for customers.

RBI is constituting a technical consultative committee for financial markets. It will offer structured engagement with market participants and RBI across currency, money markets, government securities, forex, and derivatives markets.

The minutes of this RBI policy will be published on October 21, 2026. More concrete measures and a sense of direction will follow in the December 2026 policy statement!