RBI Turns Hawkish: 25 Bps Hike As Growth Holds Firm, Inflation Risks Broaden

The RBI MPC unanimously voted to raise the policy rate by 25 bps 5.50%. The committee also changed the stance from neutral to calibrated tightening with 4:2 majority. The decision came in line with market expectations, however, change in stance to calibrated tightening suggest that further hikes could be on the table amid broadening inflationary pressures. Resilient domestic growth gives the RBI room to focus on inflation for now.

Domestic Growth Resilient, While Inflationary Pressures Seem To Be Broadening

Domestic growth has shown resilience despite global economy facing headwinds from the ongoing conflict. On the demand side, discretionary spends have been strong, while government investments on infrastructure has supported domestic growth. While services exports remain buoyant, recent bi-lateral trade agreements shall also support merchandise exports. RBI revised FY27 growth estimate to 7.1%, 40 bps up from 6.7% projected in the August 2026 policy.

While inflationary pressures were previously concentrated in select components, signs of a broader-based pickup are now emerging. Inflation is expected to remain elevated at 5.6% in Q1 FY28, well above the 4% target, driven largely by El Niño conditions and higher oil prices. For FY27, the RBI raised its headline and core inflation forecasts to 5.2% and 4.4%, respectively, from 5.0% and 4.3% earlier.

Banking System Liquidity Remains Comfortable, Raising Scope for Further Absorption

Banking system liquidity continues to be comfortable aided by deluge of inflows through FCNR deposits. RBI has been actively managing liquidity to align the weighted average call rate (WACR) with the policy repo rate. Going forward, further measures such as OMO sales and variable rate reverse repos could be deployed to absorb excess system liquidity. While liquidity and policy rate are on tightening path, we don’t foresee system liquidity to fall under 1% of NDTL.

Market Reaction

As the RBI raised the rate by 25 bps and changed the stance to calibrated tightening, broader market index Nifty 500 fell by 0.4%, while 10Y yields hardened by ~ 5 bps however, INR still depreciated by ~0.3%.

Ionic Wealth View

The RBI Governor sounded incrementally more comfortable about raising interest rates as the current macroeconomic backdrop of broadening inflationary pressures but resilient growth gives RBI the space to prioritize inflation for now. While today’s rate hike was broadly in line with expectations, the change in stance to calibrated tightening signals that inflation now takes precedence over growth for most MPC members, even though two members still preferred a neutral stance. This points to likely further hikes in upcoming policies unless growth disappoints sharply. In addition, India’s rate cycle is now equally dependent on global macroeconomic conditions. With the US Fed and several other major central banks also on a tightening path, the global rate-hike cycle is becoming more synchronized among developed markets. EM ex Brazil and China are also on hiking path. Timely hike help curb the pressure on currency and therefore also imported inflation. While liquidity and policy rate are on tightening path, we don’t foresee system liquidity to fall under 1% of NDTL.

(Source: RBI)