RBI holds Repo Rate at 5.50 Percent amid benign inflation and global uncertainty

By: Team India Tracker

In the first half of 2025, the RBI had reduced the repo rate by 100 basis points to support economic recovery and boost demand.

The Reserve Bank of India (RBI) on Wednesday decided to maintain the key repo rate at 5.50 percent, in line with market expectations. This marks the second consecutive pause in its monetary easing cycle, as the central bank assesses the combined effects of earlier rate cuts and recent fiscal measures amid global trade uncertainties.

In the first half of 2025, the RBI had reduced the repo rate by 100 basis points to support economic recovery and boost demand. However, the Monetary Policy Committee (MPC) chose to hold rates steady at both its August and October meetings, maintaining a neutral policy stance. The decision to keep the rate unchanged was supported unanimously by all six members of the MPC.

RBI Governor Sanjay Malhotra noted that inflationary pressures have eased considerably, largely due to a sharp decline in food prices and the government’s recent reductions in Goods and Services Tax (GST) rates. Reflecting this improved inflation outlook, the RBI has revised its average inflation projection for 2025–26 to 2.6 percent, down from the earlier forecast of 3.1 percent made in August.

Source: Reserve Bank of India

The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026. The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was last increased on February 08, 2023 by the Monetary Policy Committee (MPC) by 25 basis points (bps), bringing it to 6.50 percent. The MPC had increased the benchmark interest rate by 250 basis points in the fiscal year 2022-23 in an effort to control the raging inflation. The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. In the event of inflation, central banks increase repo rate as this restricts the commercial banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation. 

Source: Reserve Bank of India 

On the growth front, the central bank expressed greater optimism about the domestic economy. The GDP growth forecast for the financial year 2025–26 has been raised to 6.8 percent from 6.5 percent earlier. The RBI attributed this upward revision to robust domestic demand, a favorable monsoon, the cumulative impact of earlier monetary easing, and supportive fiscal measures such as GST cuts.

Governor Malhotra emphasized that the central bank is taking a cautious, data-driven approach to future policy actions. He stated that the RBI would prefer to allow the effects of past policy measures to fully play out and to monitor evolving trade conditions before making further adjustments. “It would be prudent to wait for the policy actions to play out before charting out the next round of monetary policy measures,” he said, highlighting the RBI’s balanced approach toward sustaining growth while ensuring price stability.

The RBI’s decision to keep the repo rate unchanged at 5.50 percent will have immediate implications for both borrowers and depositors. Since many banks now link their external benchmark lending rates (EBLR) directly to the repo rate, these rates will also remain unchanged. Consequently, borrowers with loans tied to the repo benchmark will see no change in their equated monthly instalments (EMIs). Deposit rates are also expected to stay steady for the time being.

However, the effect will differ slightly for borrowers whose loans are linked to the marginal cost of funds-based lending rate (MCLR). Unlike EBLR, the MCLR is influenced by a bank’s cost of funds, liquidity conditions, and credit demand. This means that while repo-linked loans will remain unaffected, banks may still make minor adjustments to MCLR-linked loans, depending on their internal cost structures and market conditions. As such, some borrowers may experience small fluctuations in their lending rates even without a change in the policy rate.

The monetary policy review also took place against a backdrop of heightened global economic uncertainty. The United States recently imposed an additional 25 percent tariff on Indian goods starting August 27, effectively doubling the tariff burden on several key export categories to 50 percent. These protectionist measures have introduced fresh stress into India’s trade environment, with ongoing negotiations between New Delhi and Washington aimed at mitigating the potential fallout. The outcome of these talks could have a significant bearing on India’s export competitiveness, external trade balance, and overall growth outlook.

At the same time, the global monetary landscape is shifting. The US Federal Reserve recently cut its benchmark interest rate by 25 basis points, bringing it down to a range of 4 to 4.25 percent, the first rate reduction of 2025. The move signals growing concerns about a slowdown in global economic growth and financial stability. For India, this easing by the Fed could have multiple spillover effects, including potential changes in capital inflows, movements in the rupee, and imported inflation pressures, particularly through commodity prices.

Overall, the October policy review reflects the RBI’s approach of cautious optimism, balancing confidence in India’s domestic recovery with vigilance toward external vulnerabilities. The central bank recognises that domestic growth has been stronger than anticipated, inflation has eased more than expected, and reforms such as GST rate rationalisation are likely to bolster consumption and investment. However, it remains mindful of the external headwinds posed by US trade actions, volatile global markets, and potential capital flow reversals. By maintaining its current policy stance, the RBI aims to provide stability while retaining the flexibility to respond swiftly to any adverse global or domestic developments.