Indian stock markets fell sharply on October 7 after the Reserve Bank of India's Monetary Policy Committee unanimously raised the repo rate by 25 basis points to 5.5% from 5.25%. The Sensex declined as much as 529 points, or 0.7%, to an intraday low of 72,539.18, while the Nifty 50 dropped 191 points, or 0.8%, to 22,585.05. Market breadth remained weak with only Kotak Mahindra Bank, Bharti Airtel, Bajaj Finance, Eternal and IndiGo emerging as gainers, while the other 25 Sensex constituents traded lower. Titan was the biggest loser, followed by BEL, Asian Paints, UltraTech Cement, Power Grid and Bajaj Finserv. Among sectors, Nifty Bank and Nifty Financial Services declined more than 0.3% each, with Nifty Metal falling 1.5% and Nifty Auto down 1.1%. Nifty FMCG, Nifty Realty and Nifty IT also fell around 0.8% each. However, the Nifty Bank index recovered more than 500 points from the day's low after the RBI's policy announcement, as banks immediately raised their External Benchmark Lending Rate (EBLR) following the rate hike.
The RBI's decision to raise the repo rate by 25 basis points to 5.5% marks the end of a 43-month pause in rate hikes, with the central bank last increasing rates by 250 basis points cumulatively over six sessions between May 2022 and February 2023. In his address, RBI Governor Sanjay Malhotra made it clear that any rate cuts were 'off the table' in the near future, hinting at a hike cycle that mirrors the 2022-23 period. Economists expect further rate increases, with Purvi Mundhra from Choice Institutional Equities predicting a further 25 basis points at each of the next two MPC meetings in December 2026 and February 2027. The inception of this hike cycle is similar to the 2022-23 period, when the Shaktikanta Das-led MPC raised rates by 40 basis points to 4.40% in May 2022 during an off-cycle meeting, prompted by stubborn inflation and economic rejuvenation. However, the present rate revision was largely anticipated, unlike the shocker delivered in 2022 when the emergency RBI meeting caught markets off-guard. The RBI also left the Cash Reserve Ratio untouched on Wednesday, unlike in May 2022 when it complemented the rate hike with a 50-bps CRR increase to 4.5%, draining over ₹80,000 crore from the banking system.
India's inflation story is beginning to change significantly, with CPI inflation rising to 4.8% in August 2026 from 3.4% in March, driven primarily by food and fuel categories but showing worrying signs of broader price pressures. Food and beverages inflation increased to 5.66% in August from 3.7% in March, with animal protein and spices accounting for nearly 48% of the 200-basis-point increase between March and August. Fuel inflation also moved sharply higher, with CPI fuel inflation increasing to 5.2% in August from 0.4% in April, reflecting higher global crude oil prices and domestic price increases. However, the most concerning development is the spread of inflation pressures beyond these volatile categories, with core inflation (excluding food and fuel) rising from 3.7% in April to 4.2% in August 2026. Core inflation excluding precious metals increased even more dramatically from 2.2% in April to 2.9% in August, indicating that price pressures are moving beyond gold and silver to affect a broader range of goods and services.
The RBI significantly raised its FY2027 GDP growth forecast to 7.1% from 6.7% earlier, reflecting improved economic momentum and resilience. The central bank's Q2 growth estimate was raised to 7.2% from 6.4%, while the Q3 projection was increased to 6.9% from 6.5%. The Q4 forecast was retained at 6.8%, while for Q1 FY2028, the RBI lowered its growth projection to 7.1% from 7.3% earlier, saying the risks to its growth outlook are evenly balanced. Governor Sanjay Malhotra noted that high-frequency indicators point to continued momentum in economic activity during the second quarter, albeit at a slower pace than in the first quarter. The rate hike decision comes in the wake of the economy recording a strong GDP growth of 7.8% in Q1:(April-June) 2026-27, providing additional justification for the monetary tightening. According to RBI, global economic uncertainty will continue to have some bearing on domestic economic activity. While energy prices and supply chain pressures have continued, their near-term trajectory remains uncertain amidst the lingering West Asia conflict. The repo rate, which is the interest rate at which the central bank provides funds to banks to help them overcome short-term liquidity mismatches, had been static since December 2025 at 5.25%.
Crucially, with a 4:2 majority, the MPC changed its stance from 'neutral' to 'calibrated tightening', signaling a measured approach to future rate adjustments. As explained by Governor Malhotra, a 'calibrated tightening' would mean a milder form of tightening that will be more measured and after having taken into consideration the evolving conditions on the growth-inflation mix. The forward guidance indicates that while a cut is off the table, the pace and extent of future rate hikes will depend on actual inflation outcomes and possible shifts in future projections. A July 2024 study by the RBI staff had estimated the natural rate — the real policy rate that is neither expansionary nor contractionary — at 1.4-1.9%. According to this estimate, there is scope for a rate increase of about another 100 basis points. It is possible that the estimate for the natural rate would have changed since then. The biannual Monetary Policy Report, also released on Wednesday, shows that the RBI expects an average inflation rate of 5% in 2027-28. Monetary policy in 2027 will also depend on the level of the real policy rate that the RBI considers appropriate for the Indian economy.
