The Reserve Bank of India's Monetary Policy Committee announced a 25 basis points hike in benchmark lending rates on Wednesday, marking the first increase in nearly four years. The central bank raised the repo rate from 5.25% to 5.5%, with the six-member rate panel voting unanimously for the decision. According to RBI Governor Sanjay Malhotra, the decision was taken amid mounting inflation concerns and strong economic growth, with India joining major central banks in raising rates as higher oil prices triggered by the Iran war fuel inflation. The surprise element was the change in MPC's policy stance from 'neutral' to 'calibrated tightening', signaling a distinctly hawkish tone. As per The Times of India, the move will hurt consumption during the festive season, with mortgages and other loans set to become more expensive while deposits will start yielding higher returns in a few weeks. Major banks responded swiftly, with Punjab National Bank raising its Repo Linked Lending Rate (RLLR) from 8.10% to 8.35%, Indian Bank increasing its Repo Linked Benchmark Lending Rates (RBLR) to 8.20% from 7.95%, and Bank of Baroda raising its Repo Based Lending Rate to 8.15% from 7.90%. Other major lenders including Bank of India and Indian Overseas Bank also announced rate increases, with Tamilnad Mercantile Bank raising its RLLR to 8.5% from 8.25%. According to Mint, these rate increases are effective from October 8, with banks implementing the changes immediately following the RBI's announcement.
The 25 basis points repo rate hike will directly impact borrowing costs for customers with floating rate loans, with home loan EMIs expected to increase for those with external benchmark-linked loans. According to The Times of India, the move will raise the EMI on a ₹1 crore loan over 15 years by around ₹1,500 a month, or about ₹1,471 at a base rate of 8.5%. If EMI remains unchanged, the higher rate could extend the loan by about 5.5 to 5.9 months, equivalent to six additional instalments. PNB has revised its Repo Linked Lending Rate (RLLR) from 8.10% to 8.35% with effect from October 8, while maintaining its Marginal Cost of Lending Rate (MCLR) and Base Rate unchanged. Indian Bank increased its RBLR to 8.20% from 7.95%, Bank of Baroda raised its RBLR to 8.15% from 7.90%, and Bank of India and Indian Overseas Bank both increased their RBLR to 8.35%. Tamilnad Mercantile Bank raised its RLLR to 8.5% from 8.25%. As per Mint, existing borrowers should check their loan's benchmark and reset frequency to understand when the rate hike could affect their repayments. For borrowers whose tenure is extended, the monthly outgo may remain stable, but the longer repayment period can increase the overall interest cost. The broader equity market slipped on Wednesday, but Bank Nifty rose initially as banks are expected to raise lending rates, which will boost their net interest margins. Nifty and Sensex closed 0.75% and 0.58% lower respectively, while Bank Nifty closed marginally lower.
Major banks have announced comprehensive rate increases following the RBI's repo rate hike, with seven banks raising their repo-linked lending rates effective from October 8. According to Business Standard, the following banks have implemented rate revisions: Punjab National Bank (8.10% to 8.35%), Bank of India (8.10% to 8.35%), Bank of Baroda (7.90% to 8.15%), Indian Bank (7.95% to 8.20%), Indian Overseas Bank (8.10% to 8.35%), UCO Bank (8.05% to 8.30%), Tamilnad Mercantile Bank (8.25% to 8.50%), and Karur Vysya Bank (8.55% to 8.80%). The timing of these changes varies, with some banks implementing the increases on October 7 while others followed on October 8. As per Business Standard, a bank's repo-linked benchmark is not necessarily the final interest rate charged to customers, as the actual rate depends on the spread charged by the lender and loan terms. The transmission is not identical across all products, as lenders also consider their funding costs, margins and loan agreements. Loans linked to an external benchmark generally reflect policy rate changes more directly than loans linked to the marginal cost of funds-based lending rate (MCLR).
Governor Sanjay Malhotra's statement that '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' has triggered intense debate on the length of the current rate hike cycle. Most analysts are pencilling in a further three-quarters to one percentage point of hikes, which would take the policy rate to 6-6.25%. The RBI rarely describes its stance as 'calibrated tightening' - the usual descriptors are 'accommodative' and 'neutral'; during the 2022-23 tightening cycle, it used 'withdrawal of accommodation'. The last time the RBI adopted this stance was in October 2018 under then-RBI governor Urjit Patel, moving from 'neutral' while keeping the repo rate unchanged at 6.5% amid rising international crude oil prices and foreign exchange volatility. The duration and extent of the rate hike cycle will be contingent on the actual growth-inflation developments and outlook, especially that of underlying inflation, the extent of broadening of price pressures and second round effects of the supply shock. Economists expect the current tightening cycle to be shallow, with a cumulative 75 basis points rate increase expected in the current cycle, meaning borrowing costs could therefore rise further in the coming months.
RBI Governor Sanjay Malhotra indicated that the central bank's new 'calibrated tightening' stance signals a 'milder form of tightening, (which is) more data dependent than pre-determined'. The governor emphasized that 'headline CPI (consumer) inflation is expected to average almost 5.8% in the next three quarters' and noted there is some evidence of elevated inflation expectations and broadening of price pressures. The RBI now expects inflation at 5.2%, up from its earlier forecast of 5%, while core inflation is seen at 4.4% from 4.3% earlier. Inflation is expected to peak at 6% in the third quarter, with the estimate for the first quarter of FY28 at 5.6%. The monetary policy statement does not give an estimate of the crude oil price, but the Monetary Policy Report revised the assumption to $95 per barrel for the second half of the year, up from the baseline assumption of $85 per barrel maintained in June and August reviews. The price of the Indian crude basket rose from $82 a barrel in July to around $114-116 a barrel in September. Citing continued supply-side pressures from a deficient southwest monsoon, El Niño conditions and high volatility in international oil prices, the RBI said 'inflation and its outlook are not benign'.
RBI Governor Sanjay Malhotra indicated that credit growth is currently running at a robust 18-19%, which is significantly above the sustainable long-term rate of 12-14%. However, he expects some moderation as policy rate transmission takes place over the next couple of quarters, affecting both demand and borrowing costs. According to The Hindu BusinessLine, Malhotra emphasized that 'a moderation from current levels would still be healthy and sufficient to support economic growth'. On liquidity management, the RBI Governor noted that currency leakage alone typically absorbs around ₹3 lakh crore, and the central bank has already undertaken sell-buy swaps. He expects a significant portion of the excess liquidity to be absorbed within this financial year itself, with other tools such as OMOs, VRRRs, and spot market interventions to support the rupee. Following $143.6 billion of foreign exchange inflows through the special swap facility opened in June, the banking system has seen a daily average liquidity surplus of ₹5.9 trillion since the last MPC meeting in August, though this has moderated recently. The RBI has been selling government bonds through open market operations and holding variable rate reverse repo auctions to absorb excess cash from the banking system.
