RBI raises rates as inflation tests India’s growth momentum

The Reserve Bank of India raised its repo rate to 5.50% on Wednesday, prompting several banks to lift lending rates from October 8.

The unanimous decision marks a shift from a neutral stance to calibrated tightening, putting pressure on home-loan borrowers while signalling that inflation has become a bigger concern. The RBI says economic activity remains resilient and projects 7.1% growth this year.

The benchmark repo rate will rise by 25 basis points after all six members of the Monetary Policy Committee backed the move. The RBI also moved its stance from neutral to calibrated tightening.

The unchanged stance from August has now been reversed. In February 2023, the RBI last increased the repo rate, lifting it by 25 basis points to 6.50%. The MPC met over three days, from October 5 to 7.

Retail inflation rose to 4.82% in August, up from 4.45% in July. The government requires the RBI to hold consumer price index-based retail inflation at 4%, allowing a tolerance band of 2 percentage points on either side.

RBI Governor Sanjay Malhotra said: "It is further observed, in light of the available data, that it is clear that inflation and its outlook are not benign as they were last year. With headline CPI inflation expected to average almost 5.8 % in the next three quarters, including this, and core inflation projected at 4.4% for this financial year."

Malhotra also said: "The MPC noted that the global context, on account of geopolitical developments, remains challenging. Nonetheless, the Indian economy has been strong and the economic momentum remains broad-based. Moreover, the economy is expected to remain resilient"

Private consumption remained resilient and investment activity was strong, rising by nearly 12%, as real GDP growth reached 7.8% in the first quarter. Malhotra said the strength of economic activity, despite significant global challenges, prompted the 40-basis-point upward revision.

What changes for households

The repo rate impacts home loan rates since it is the rate at which banks borrow money from the central bank. The clearest effect will be on loans linked to the repo rate, while some MCLR and Base Rate products remain unchanged.

Punjab National Bank revised its Repo Linked Lending Rate from 8.10% to 8.35%, including a BSP of 0.35%, with effect from October 8. Indian Bank increased its Repo Linked Benchmark Lending Rates to 8.20% from 7.95%.

Bank of Baroda increased its Repo Based Lending Rate to 8.15% from 7.90%. Bank of India and Indian Overseas Bank raised their Repo Based Lending Rate to 8.35%, while Tamilnad Mercantile Bank increased its Repo Linked Lending Rate to 8.5% from 8.25%. Punjab National Bank said its MCLR and Base Rate would remain unchanged.

Paisabazaar collected the home-loan data on September 30, 2026. For loans of above Rs 30 lakh to Rs 75 lakh, the rates were 7.35% from Federal Bank and 7.25% from Bajaj Housing Finance.

Adhil Shetty, CEO, Bankbazaar, said: "Many lenders extend the tenure to keep the EMI unchanged, which feels easier but costs more over time. Asking your lender how the change will be applied, and making a small prepayment each year, can help limit the extra interest."

Malhotra said: "Taking all these factors into consideration, real GDP growth for this year is projected at 7.1 percent, with Q2 at 7.2 percent, Q3 at 6.9, and Q4 at 6.8 percent,"

Banks' revised lending rates take effect on October 8. Whether other lenders will announce increases in their benchmark lending rates, and whether the RBI raises rates again at its next policy review, is not known.