The decision is actually in line with a global trend.

The increase in the repo rate – which is the rate at which banks borrow from the central bank - comes as a dampener for Indians gearing up for the festive season. 



Typically, the RBI has never raised interest rates during the festive season. But it did so this time to maintain the interest rate differential, especially with the US Fed, to discourage outflow of funds by foreign institutional investors (FIIs).

Central Banks Play Same Shot

In response to the continuing crisis in West Asia and rising prices of crude oil and other commodities, several central banks across the world, including the US Federal Reserve, European Central Bank and Bank of Japan, had already raised their benchmark interest rates by 25 basis points in September. The Reserve Bank of Australia and Reserve Bank of New Zealand too hiked their benchmark rates. 

Central banks in the West Asian region too followed the US Fed. These include Saudi Central Bank, Central Bank of UAE, Qatar Central Bank, Central Bank of Oman, and Central Bank of Bahrain.

The outliers were Bank of England and Bank of Canada, as these opted for status quo on policy rates in September.

The Reserve Bank, this time around, raised interest rates after three-and-a-half years and also changed the policy stance to ‘calibrated tightening’, indicating that it could go in for further hikes in the coming months.

Giving justification for the rate hike, RBI Governor Sanjay Malhotra said, “Lingering trade uncertainty, rising bond yields in advanced economies, and an appreciating dollar are keeping global financial market sentiments nervous and fragile. Further tightening of global financial conditions, uncertainty about fair valuation of AI stocks, and an elusive resolution of the West Asia conflict pose significant downside risks to the global economic outlook.”

According to Dipti Deshpande, Senior Director and Principal Economist, Crisil Limited, the RBI’s decision “to change the monetary policy stance to ‘calibrated tightening’ and raise the policy repo rate by 25 basis points is in line with our expectations and reflects a precautionary response to an increasingly challenging inflation environment.”

Vikas Garg, Head of Fixed Income at Invesco Mutual Fund, said, “The rate trajectory will depend heavily on crude oil prices, which could shift the policy path in either direction.”

Inopportune Time For Rate Hike

For retailers, manufacturers, and banks, a rate hike could not have come at a more inopportune time, as Dhanteras and Diwali traditionally generate a significant concentration of annual demand. 

This year, Dhanteras will be celebrated on 6 November and Diwali on 8 November.

The worst impacted would be the country’s micro, small, and medium enterprises (MSMEs), which have been battling several challenges in the last few months. The hike in the benchmark interest rate by the RBI will escalate their problems, as they would have to pay more for their loans. 

The interest liability for the industry has remained stable since December 2025.

“The festive season is one time of the year when the MSME sector makes quick money and sales zoom, but now with the hike in interest rates, this would naturally be a dampener,” a promoter, who has a mid-sized business in Punjab, told The Secretariat.

The RBI rate hike will raise the EMIs of existing loans and make fresh borrowing expensive for consumers as well as the industry. The immediate impact would be felt in cars, two-wheelers, consumer durables, electronics, and housing, where consumers often depend on financing.

A large share of purchases is undertaken on loans. Floating-rate home loans, corporate loans, and other loans linked to external benchmarks will become dearer.

Higher EMIs would prompt buyers to postpone purchases, opt for cheaper models or increase their down payments. For households already servicing home, auto, or personal loans, higher interest costs could also reduce disposable income available for festive purchases.

The impact on cash purchases of groceries, apparel, and other small-ticket items would be less direct. However, if higher rates persist, households may become more cautious about discretionary spending and increase savings, potentially moderating the overall festive consumption impulse.

Outlook On Inflation 

On the domestic front, one of the reasons for the rate hike is to contain inflation. 

The RBI is mandated to keep Consumer Price Index (CPI) or retail inflation at 4%, with a tolerance band of 2% on either side. CPI inflation increased to 4.8% in August 2026 from 4.5% in July, mainly driven by the rising prices of food and fuel.

“The near-term outlook on inflation points towards continued pressures from the supply side, on account of the deficient Southwest monsoon, El Nino conditions and high volatility in international oil prices. Price pressures are increasingly becoming visible across a range of commodities within the food component, apart from oil. In addition, early signs of inflation becoming generalised are also evident from the increase in core inflation and higher inflation across a larger segment of the CPI basket,” Malhotra said while unveiling the bi-monthly monetary policy.

The RBI has projected the CPI inflation for FY2026-27 at 5.2% with Q2 at 4.9%; Q3 at 6.0%; and Q4 at 5.7%. Inflation for Q1 in FY2027-28 is projected at 5.6%, with risks being evenly balanced. Core inflation has been projected at 4.4% for FY2026-27.

“We shall implement policies that further add to this resilience. Accordingly, we shall strive for price and financial stability as both are essential for sustainable growth in the long run.”

India’s GDP Growth Story

As regards growth, the RBI raised the GDP projection by 40 basis points (bps) to 7.1% for the current financial year.  

“The upward revision in growth forecast by 40 bps further underscores the strength of economic activity despite significant headwinds,” the Governor said.

The World Bank, in its report published Tuesday, raised India’s growth projection to 7.1% for FY2026-27, up from 6.6% estimated earlier.

Meanwhile, the Indian economy grew by 7.8% in 2025-26.

The upward revisions to growth and inflation forecasts, the rate action and change in monetary policy stance help align market expectations with evolving macroeconomic realities, Deshpande said, adding, “the central bank is expected to remain committed to maintaining orderly liquidity and financial conditions as the economy enters the festive season. We see room for another rate hike of 25 basis points in December.”

The RBI’s willingness to take a difficult decision, said Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Group, “should reassure markets about its commitment to price stability and strengthen confidence in its management of an unusually challenging environment.”