RBI adopts pre-emptive tightening to curb spill-over from food and oil shocks

In its October meeting, the Reserve Bank of India announced a 25-basis-point increase in the repo rate, taking it to 5.5% for the first time in almost four years. Governor Sanjay Malhotra explained that the RBI is moving ahead of potential second-round inflation effects stemming from a weak monsoon, rising crude prices and higher food costs, which monetary policy cannot directly resolve. The central bank also plans tighter liquidity management to bring the weighted-average call rate closer to the new policy rate, ensuring the rate hike translates into higher funding costs.

Confidence in the economy’s strength—reflected in a revised FY27 growth forecast of 7.1% and solid performance across consumption, investment, services and manufacturing—allows the RBI to prioritize price stability. Rapid credit expansion, now up 18.1% year-on-year, is being monitored to avoid adding demand pressure. The RBI’s “calibrated tightening” stance means future moves will be conditional on whether core inflation persists, price pressures spread, and demand remains robust, rather than following a predetermined hike path.