Repo rate raised to 5.5%: RBI shifts stance to calibrated tightening for borrowers

Home loan EMIs face upward pressure while fixed deposit returns may stay firm, with FY27 growth forecast lifted to 7.1% and inflation projection raised to 5.2%

The Reserve Bank of India on Wednesday raised the policy repo rate by 25 basis points to 5.5 per cent, its first increase in three years, as rising inflation, higher oil prices and a challenging geopolitical environment prompted the central bank to shift its monetary stance towards tightening.

The repo rate, which influences borrowing costs across the banking system, was increased from 5.25 per cent. The move is expected to push up borrowing costs for customers with floating-rate loans, particularly home loans, while offering scope for higher deposit rates.

The RBI also changed its monetary policy stance from "neutral" to "calibrated tightening" -- a formulation last used in 2018 -- signalling that further rate increases remain possible. Economists expect another 50-75 basis points of hikes in the current cycle.

"The MPC (Monetary Policy Committee) noted that the global context on account of geopolitical developments remains challenging. It further observed that in light of available data, it is clear that inflation and its outlook are not benign as they were last year, with headline CPI inflation expected to average almost 5.8 per cent in the next three quarters and core inflation projected at 4.4 per cent this financial year. In this milieu, recalibrating the policy rate is imperative," RBI governor Sanjay Malhotra said.

Explaining the change in stance, Malhotra said rate cuts were off the table in the near term and future policy action would be either a hike or a pause, depending on the evolving growth and inflation outlook.

"The MPC also decided to change the stance to calibrated tightening. It underscored that given the current conditions, rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook," he said.

Borrowers feel the heat

The rate increase will feed through to retail borrowers whose floating-rate loans are linked to external benchmarks such as the repo rate. Lenders could either increase equated monthly instalments (EMIs) or extend loan tenures, depending on their reset mechanisms.

At the end of June, more than 68 per cent of floating-rate loans were linked to external benchmarks.

"For home loan borrowers, this will show up as a higher EMI or a longer tenure, depending on the lender. Floating rate loans linked to the repo rate usually reset within a few months," said Adhil Shetty, CEO of Bankbazaar.

At an interest rate of 7.5 per cent over 25 years, the latest hike (to 7.75 per cent) could increase the monthly EMI by about ₹490 on a ₹30 lakh loan, ₹654 on a ₹40 lakh loan and ₹817 on a ₹50 lakh loan. Over the full tenure, the additional interest outgo could be around ₹1.5 lakh, ₹1.96 lakh and ₹2.45 lakh, respectively, Shetty said.

The higher policy rate could also keep fixed deposit rates firm and create room for selective upward repricing.

Current one- to two-year fixed deposit interest rates for deposits below ₹1 crore are around 6.3-7 per cent at major private banks, while small finance banks are offering rates of up to 8.1 per cent.

However, the repo hike does not automatically translate into a 25-basis-point increase in deposit rates across banks, Shetty said, as pricing of deposits will depend on funding requirements and competition.

Growth outlook raised

Despite the tightening, the RBI raised its FY27 growth forecast by 40 basis points to 7.1 per cent from 6.7 per cent earlier.

The central bank expects sustained services activity, stable employment and resilient non-farm activity to support consumption, while government infrastructure spending, a revival in private capital expenditure and strong credit growth are expected to underpin investment.

"Global economic uncertainty and supply chain disruptions are expected to have some bearing on domestic economic activity. Furthermore, weak southwest monsoon along with strong El Niño conditions may impact the upcoming rabi season and rural demand," Malhotra said.

He added that buoyant services exports and recently operationalised bilateral trade agreements should support merchandise exports.

Inflation concerns

The RBI, however, raised its FY27 inflation forecast to 5.2 per cent from 5 per cent earlier, citing risks from food prices, oil and weather conditions.

"The near-term outlook on inflation points towards continued pressures from supply side, on account of the deficient southwest monsoon, El Nino conditions and high volatility in international oil prices," Malhotra said.

He added that price pressures were becoming visible across a wider range of food commodities, while rising core inflation indicated early signs of inflation becoming more broad-based.

More hikes likely

Economists expect the RBI to continue tightening monetary policy, although the pace will depend heavily on global oil prices and geopolitical developments.

"We expect cumulative rate hikes by the central bank to the tune of another 50-75 basis points over the next few months. The risk of a more aggressive rate hike cycle hinges on whether the current West Asia conflict and rise in oil prices continue to linger on for longer," said Sakshi Gupta, principal economist at HDFC Bank.

Dipti Deshpande, senior director and principal economist at Crisil, said the combination of higher oil prices, monsoon risks, stronger-than-expected domestic growth, easier liquidity and global monetary tightening warranted further action.

"We see room for another rate hike of 25 basis points in December," she said.

Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, expects another 25-50 basis points of rate hikes, with further upside risks if global pressures persist.

"Given that the RBI now sees the Q1FY28 inflation print at 5.6 per cent, a total of 100 basis points may be needed in this cycle," said Indranil Pan, chief economist, Yes Bank.