The Monetary Policy Committee (MPC) also signalled that another rate increase could be on the table, with four of its six members voting to change the policy stance – from ‘neutral’ to ‘calibrated tightening’ – even as it raised FY27 growth forecast by 40 basis points (bps) to 7.1%, matching the latest upgraded World Bank assessment.
This is the first rate increase on governor Sanjay Malhotra’s watch after 125 bps of reductions and a 100-bps cut in cash reserve ratio (CRR) since he took charge in December 2024. In the policy statement, the governor said the revised stance indicates that “given current conditions, rate cuts are off the table in the near term, and policy action can only be a hike or a pause, depending on evolving conditions.”
The MPC said that “in light of the data, it is clear inflation and its outlook are not benign as they were last year.”
“In this milieu, recalibrating the policy rate is imperative,” said Malhotra.
The benchmark 10-year bond yield climbed to a near three-year high on Wednesday, settling at 7.24%, up 5 bps from its previous close. The rupee retreated to 96.84 per dollar, close to its record low of 96.96 hit on May 20.
Responding to a query, Malhotra said the rupee may be “undervalued,” and described short-term financial market behaviour as “irrational.”
‘Recalibrating Imperative’
The US Federal Reserve and the European Central Bank (ECB) each raised policy rates by 25 basis points mid-September, seeking to restrain inflation. Japan, known for near-zero rates that spawned ‘yen-carry’ trades worldwide, followed two days later in raising rates to tame yields that scaled peaks last seen in 1996.
Against this backdrop of rising cost of funds from Tokyo to Washington, RBI pivoted toward hardening policy rates and altered its stance, as an energy supply chokehold and scanty rains forced Mint Road to raise FY27 consumer inflation projections by 20 basis points.
In the policy statement, Governor Malhotra said the revised stance indicates that “given the current conditions, rate cuts are off the table in the near term, and policy action can only be a hike or a pause, depending on the evolving conditions.”
‘Price Risks’
The MPC observed that “in light of the available data, it is clear inflation and its outlook are not benign as they were last year.”
“In this milieu, recalibrating the policy rate is imperative,” Malhotra said.
Ahead of the policy announcement, 20 of the 21 bank executives, analysts and economists polled by ET expected monetary policymakers to raise rates by 25 basis points.
The benchmark 10-year Indian bond yield climbed to a near three-year high on Wednesday, settling at 7.24%, up 5 basis points from its previous close. The rupee retreated to 96.84 per dollar, close to its record low of 96.96 hit on May 20.
Responding to a query, Malhotra said the rupee may be “undervalued,” and described short-term financial market behaviour as “irrational.”
FCNR(B) Cushion
Interest rates in loans for homes and small businesses will rise immediately because retail and MSME loans are linked to the repo rate.
Deposit rates, however, are unlikely to increase anytime soon, as large banks have adequate liquidity from $133 billion mobilised under the foreign currency non-resident-bank {FCNR(B)} programme.
Malhotra said credit growth should remain strong despite the rate increase. He added that surplus liquidity generated by FCNR(B) deposits could be drained from the banking system within this financial year.
Kanika Pasricha, chief economic adviser at Union Bank, expects another 50-basis point increase in the policy rate by the end of this financial year. HDFC Bank’s principal economist Sakshi Gupta expects rates to rise 50-75 bps in the coming months. Soumya Kanti Ghosh, group chief economic adviser, State Bank of India, expects a further 50-bps increase to 6% by December itself.
