RBI Shifts To 'Calibrated Tightening' As Rate-Hiking Cycle Begins

(RTTNews) - India's central bank hiked interest rates for the first time in nearly four years and shifted the policy stance to "calibrated tightening", suggesting that policymakers have embarked on a rate-hiking cycle as the economy navigates a myriad of worries including surging oil prices, poor monsoon, weaker rupee and the geopolitical tensions worldwide.

"The global context on account of geopolitical developments remains challenging," the Reserve Bank of India Governor Sanjay Malhotra said on Thursday as the rate-setting body led by him decided unanimously to raise the repo rate by 25 basis points to 5.50 percent. The widely expected move was the first such since February 2023.

The Monetary Policy Committee also decided to change the stance to "calibrated tightening" from "neutral" in a 4-2 split vote. This shift signaled that more interest rate hikes are likely in the near term.

Malhotra was clear with regard to the forward guidance as he said the latest policy decisions "underscored that given the current conditions, rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook."

"The duration and extent of the rate hike cycle would be contingent on the actual growth-inflation developments and outlook, especially that of underlying inflation, the extent of broadening of price pressures and second round effects of the supply shock, as also the impact of demand impulses," the RBI chief added.

Despite the challenging global situation, the Indian economy has been strong, and the economic momentum remains broad-based, the central bank observed, adding that the economy is expected to remain resilient going forward.

Given the harsh inflationary conditions, recalibrating the policy rate is imperative, Malhotra said.

"The West Asia conflict, tariff related uncertainties, elevated bond yields and risks of an unwieldy correction in valuation of AI stocks are keeping global economic sentiments edgy with risk-off sentiments on emerging market economies," Malhotra said.

The RBI Governor said there are limited signs of supply side pressures getting embedded in pricing behavior even as he acknowledged that there is some evidence of elevated inflation expectations and generalization of inflation. Risks in view of strong growth in monetary and credit aggregates exist though there is limited evidence of demand side pressures, the bank said.

The RBI raised India's growth forecast for 2026-27 to 7.1 percent from 6.7 percent, citing the strong economic activity despite significant headwinds. The risks are evenly balanced, the central bank added.

Inflation is projected to remain high in the coming months due to continued pressures from supply side, on account of the deficient Southwest monsoon, El Nino conditions and high volatility in international oil prices. The bank observed that price pressures are permeating to a wide range of commodities in addition to oil and the core inflation is rising.

The inflation forecast for 2026-27 was raised to 5.2 percent from 5.0 percent and the core measure is projected at 4.4 percent.

Malhotra addressed currency concerns, stating the rupee may be "undervalued" by many measures. The Indian currency hit a record low against the dollar on the day of the policy announcement. The RBI plans to focus on stabilizing the currency and help it reach its correct value, though Malhotra acknowledged markets can be "irrational" and will find the right value over time.

The RBI is now widely expected to raise interest rates by at least 50 basis points in the current tightening cycle as the inflationary pressures persist due to the ongoing West Asia conflict, the subsequent volatility in the financial markets and the effects of the El Nino weather conditions.

Economists at HDFC Bank said the overall tone of the policy statement was hawkish and expect the central bank to raise rates by another 50-75 basis points in the coming meetings. The bank's principal economist Sakshi Gupta said the bank is likely to deliver back-to-back increases rather than following a staggered approach. The economist did not completely rule out "a longer and higher rate hike cycle" at this stage but saw it as "a lower probability event".

Meanwhile, ING economist Deepali Bhargava said the central bank's message was one of cautious tightening rather than outright hawkishness. The economist expects policymakers to remain data-dependent and carefully assess whether recent inflation pressures prove temporary or become more entrenched.

"We expect only a gradual hiking cycle, with another 50bp of rate hikes likely as the RBI monitors the pass-through of food and energy prices to underlying inflation," Bhargava said.