India’s benchmark 10-year government bond yield is trading near 7.23 per cent, its highest level in around two-and-a-half years, after climbing almost 30 basis points since September. Economists surveyed by Bloomberg expect the Reserve Bank of India to raise its benchmark repo rate by 25 basis points to 5.50 per cent.
Sanjay Malhotra, who assumed office as RBI governor in December 2024, is scheduled to announce the decision at 10am in Mumbai. Of 40 economists surveyed by Bloomberg, 34 expect the six-member Monetary Policy Committee to approve the quarter-point increase, which would be the RBI’s first rate rise in almost four years.
The decision comes as inflation approaches 5 per cent and has risen since the RBI’s August policy review. Crude oil has climbed back above $100 a barrel, the rupee has weakened sharply, and foreign exchange reserves have recorded their steepest weekly fall on record. India has also experienced its weakest monsoon in more than a decade.
The expected move would reverse a prolonged period of support for growth. From February 2019, the RBI cut the repo rate by 250 basis points and kept an accommodative stance through the pandemic.
That approach changed after Russia invaded Ukraine in late February 2022. Domestic inflation reached 7.8 per cent in April 2022, beyond the RBI’s tolerance zone.
On May 4, 2022, Shaktikanta Das called an unscheduled, off-cycle Monetary Policy Committee meeting, the RBI’s first such announcement by a governor since the pandemic began in 2020. He announced a 40-basis-point increase to 4.40 per cent, the first rate rise since the once-in-a-century pandemic. The surprise pushed bond yields higher and put pressure on equity indices.
A further 50-bp increase followed in June, taking the terminal rate in that cycle to 6.5 per cent. Das, who headed the committee, then held rates steady through the rest of his tenure, which ended in December 2024. He was the second-longest-serving governor in the RBI’s 91-year history.
In April 2024, Das described the changing policy landscape in a remark that became closely associated with the end of accommodation: 'The elephant has now gone out for a walk,' he said.
By September 30, the RBI had raised the short-term lending rate by 50 basis points to 5.9 per cent, its third consecutive increase. Since May 2022, it had cumulatively increased the key interest rate by 190 basis points.
The pace of tightening has divided members of the committee. Ashima Goyal was the sole dissenter when the RBI raised rates by 50 basis points, arguing instead for a 35-basis-point increase. External member Jayanth Varma said a 100 bps rise was needed 'very soon'.
Economists expect the policy outlook to remain under scrutiny after Malhotra’s announcement. Gaura Sen Gupta, chief economist at IDFC First Bank, expects a series of increases totalling 75 basis points by February. Samiran Chakraborty, a Citigroup economist, expects the RBI to lift its inflation forecast by around 10 basis points from 5 per cent and raise its growth projection from 6.7 per cent for the financial year ending March 2027.
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