RBI MPC Hikes Repo Rate by 25 bps, Changes Policy Stance to 'Calibrated Tightening'

The RBI's Monetary Policy Committee (MPC) raised the repo rate by 25 bps to 5.50% at its October 2026 meeting and changed its policy stance to 'calibrated tightening'. A less benign inflation outlook, with broadening inflation and elevated inflation expectations, prompted the MPC to act.

The MPC statement notes that the stance change signals the next move can only be a hike or a pause. It also acknowledges the difficulty of separating second-round effects from the indirect impact of supply-side pressures, and stresses that the duration and extent of the rate hike cycle will depend on growth-inflation developments, especially underlying inflation and the broadening of price pressures.

The RBI raised its FY27 inflation projection to 5.2% YoY from 5.0% in the August policy, flagging supply-side pressures from a deficient monsoon, El Niño and high commodity prices. It also raised its FY27 core inflation projection to 4.4% from 4.3%.

The RBI raised its FY27 GDP projection to 7.1% YoY from 6.7% in the August policy, but cautioned that global economic uncertainty will continue to have some bearing on domestic economic activity. The MPC statement also notes that a deficient south-west monsoon and strong El Niño conditions pose risks to the agriculture sector's outlook and rural demand.

The 25-bps hike was largely in line with expectations, reflecting a broadening of price pressures and rising upside risks to the inflation outlook. Equally significant is the shift in stance to 'calibrated tightening', which signals that anchoring inflation now takes precedence over supporting growth.

Although kharif sowing has been broadly normal, the weak monsoon could hurt crop yields, while low reservoir levels may weigh on rabi output. Further, if energy prices stay elevated, their pass-through to broader prices will follow with a lag. Against this backdrop, we expect a further 50 bps of rate hikes in this cycle.