Repo rate hiked by 25 bps to 5.50 pc: Why RBI has hiked interest rates; EMIs set to rise

RBI Raises Repo Rate To 5.50 Per Cent

The Reserve Bank of India has lifted the policy repo rate by 25 basis points to 5.50 per cent, its first increase since February 2023. The Monetary Policy Committee also shifted its stance from "neutral" to "calibrated tightening", a signal that further increases remain possible. The MPC raised its FY27 growth projection from 6.7 per cent to 7.1 per cent and its inflation forecast from 5 per cent to 5.2 per cent. Governor Sanjay Malhotra said high-frequency indicators show activity retaining momentum in the second quarter, though with some moderation from the first, and that future policy action can only be a hike or a pause.

Why The Rate Was Increased

Retail inflation stood at 4.82 per cent in August, the third straight month above the RBI's 4 per cent medium-term target, though still inside the 2-6 per cent tolerance band. Food and energy prices, weather disruptions and crude oil above $100 a barrel are feeding price pressures. Drought has been declared in about 265 of Maharashtra's 358 talukas, with risks flagged in Karnataka, Telangana, Andhra Pradesh and Rajasthan. Reservoir levels are roughly 20 per cent below last year, and possible El Niño conditions extending into 2027 pose a further risk. Globally, the US Federal Reserve raised its policy rate by 25 bps to 3.75-4 per cent, and US benchmark yields rose 53 bps to 5.31 per cent in a month, while India's 10-year bond yield rose 25 bps to 7.21 per cent.

What It Means For Borrowers

The hike is expected to feed into lending rates, particularly loans linked to external benchmarks, pushing up EMIs on home, personal and vehicle loans. MCLR-linked loans may also turn costlier, though banks retain flexibility in revising these rates based on funding costs, liquidity and deposit mobilisation. Deposit rates could rise modestly as banks reassess funding needs, offering some relief to savers whose returns have been eroded by inflation. The narrower interest-rate differential with…