RBI repo rate hike: Economists see more tightening ahead as inflation, crude pose risks

The Reserve Bank of India’s decision to raise the repo rate by 25 basis points to 5.50 per cent has set the stage for a potentially prolonged tightening cycle, with economists and industry experts flagging persistent inflation risks, higher crude oil prices, global monetary tightening and rupee weakness.

The RBI’s shift from a neutral stance to ‘calibrated tightening’ has emerged as the biggest signal from the October policy review, suggesting that the central bank is keeping the door open for further rate hikes while retaining the flexibility to pause if inflation pressures ease.

Madhavi Arora, Chief Economist at Emkay Global Financial Services, said the rate hike and the RBI’s cautious tone had prepared markets for a higher-for-longer interest rate environment.

“While the change in stance to another new nomenclature, ‘calibrated tightening', felt more like forward guidance than a policy stance per se, it has prepared markets for a higher-for-longer interest rate environment,” Arora said.

She said higher US rates and growth, sticky inflation, elevated global volatility, high oil prices and lacklustre natural dollar inflows could force India to offer a higher risk premium.

“Global financial conditions could thus increasingly dictate the RBI’s reaction function, alongside growth and inflation dynamics,” she said.

Arora expects both the policy rate and liquidity stance to tighten incrementally and maintains a cumulative 75-basis-point rate hike call in the current cycle.

Another rate hike is likely in December

Dipti Deshpande, Senior Director and Principal Economist at CRISIL, said the 25-basis-point rate hike and the change in stance were in line with expectations and represented a precautionary response to a more challenging inflation environment.

“Retail inflation has firmed in recent months, while upside risks from crude oil, commodities and food prices have become more pronounced,” Deshpande said.

She expects the calibrated tightening stance to give the RBI flexibility to either raise rates further or pause depending on how inflation evolves.

“We see room for another rate hike of 25 basis points in December,” Deshpande said.

Her assessment comes as global and domestic risks have shifted sharply since the RBI’s previous policy review. Oil prices have risen by around 40 per cent, monsoon-related risks have materialised, domestic growth has surprised on the upside, liquidity conditions have eased significantly and global monetary tightening has gathered pace.

Despite higher interest rates, CRISIL expects bank credit growth to remain strong at 14.5-15.5 per cent this fiscal, supported by resilient credit demand and improving economic activity.

Growth gives RBI room to tighten

The RBI’s decision has come against the backdrop of a relatively strong domestic economy.

Lata Pillai, Senior Managing Director and Head of Capital Markets, India, at JLL, said the strength of the economy had provided the central bank with room to act.

Real GDP growth in Q1 FY27 came in at 7.8 per cent, ahead of the RBI’s earlier projection and up from 6.9 per cent a year earlier. Manufacturing and services activity also remained in expansion territory, although momentum moderated sequentially.

The RBI has subsequently raised its FY27 real GDP growth projection to 7.1 per cent, up 40 basis points from its previous forecast.

Pillai said the stronger growth outlook should help the economy absorb the impact of dearer credit.

“The strength of the economy, in fact, has provided the RBI room to act,” she said, adding that rising energy and commodity costs and a below-average monsoon remained potential headwinds.

Inflation, crude and monsoon remain key risks

Inflation has become the central concern behind the RBI’s shift in stance.

Pillai pointed to the rise in CPI inflation to 4.82 per cent in August, alongside accelerating food inflation, as factors that likely influenced the decision.

The RBI’s inflation projection has also been revised higher, with CPI inflation for the current fiscal year projected at 5.2 per cent.

A sub-average monsoon linked to El Niño could further complicate the inflation outlook by putting pressure on food prices.

Deshpande similarly highlighted crude oil, commodities and food prices as the key upside risks to inflation.

The combination of stronger domestic growth and rising inflation risks gives the RBI greater room to prioritise price stability without immediately threatening the broader growth outlook.

Global rate cycle adds pressure

The RBI’s move also comes against a more hawkish global backdrop. Pillai said rate hikes by major central banks, including the European Central Bank, Bank of Japan and the US Federal Reserve, alongside a weakening rupee and foreign portfolio outflows, had added to the pressure on the RBI.

Higher crude prices pose a particular risk because they can widen India’s import bill, put pressure on the rupee and feed into domestic inflation.

The latest rate increase can therefore also be viewed as a measure to support the rupee and contain imported inflation, even as stronger FCNR-B deposit inflows provide some support to the external account.

Real estate braces for higher borrowing costs

For the real estate sector, the end of a prolonged period of rate stability could have implications for both homebuyers and developers.

Pillai expects floating home loan rates to be repriced, while higher construction costs could ultimately be passed on to buyers. Mid-segment housing affordability is likely to remain particularly sensitive.

“The rate certainty of the past year is likely coming to an end,” Pillai said.

However, she does not expect a single 25-basis-point increase to materially disrupt the sector. Strong demand fundamentals, robust GDP growth, rising investments and a healthy construction sector are expected to cushion the impact.

Shishir Baijal, Chairman and Managing Director of Knight Frank India, similarly said higher borrowing costs could create affordability pressures, particularly in interest-rate-sensitive and lower-priced segments, but did not expect a material disruption to the sector’s broader trajectory.

The RBI’s stronger growth outlook, he said, should support private consumption and housing demand.

Ramani Sastri, Chairman and MD of Sterling Developers, however, said the rate increase would affect housing affordability and could influence investment decisions, particularly among first-time and mid-income buyers.

Gold may remain volatile

The rate hike is also likely to keep the domestic bullion market volatile.

Darshan Desai, CEO of Aspect Bullion & Refinery, said higher interest rates could weigh on gold, but the metal could continue to attract investors as a hedge against inflation and geopolitical uncertainty.

Physical demand remains price-sensitive, with consumers and jewellers taking a measured approach despite the ongoing festive and wedding season.

Gold prices, Desai said, are likely to remain volatile as markets assess the RBI’s stance alongside US interest-rate expectations, dollar movements, crude prices and geopolitical developments.

What next for the RBI?

The key takeaway from the October policy is that the RBI appears to have moved from a prolonged wait-and-watch approach towards a more proactive response to inflation risks.

The ‘calibrated tightening’ stance gives the central bank room to raise rates further or pause depending on incoming data, but economists increasingly see another hike as a possibility.

With CRISIL forecasting another 25-basis-point increase in December and Emkay maintaining a cumulative 75-basis-point hike call for the cycle, the market is now preparing for the possibility that the repo rate could move materially higher from the current 5.50 per cent.

For borrowers, that could mean higher EMIs or longer loan tenures. For real estate, affordability and construction costs will remain key pressure points. For gold, higher rates could create headwinds, although inflation and geopolitical uncertainty could continue to support safe-haven demand.

The RBI’s challenge, therefore, is becoming more delicate: contain inflation without choking a growth cycle that has so far remained remarkably resilient.