Mixed bag: How experts diverged in their reaction to RBI raising repo rate

There have been mixed reactions to the RBI’s move to raise the repo rate by 25 bps to 5.50 per cent. The raise has ended a run of four successive holds while changing its stance to that of calibrated tightening. 

This is the first increase since February 2023 and follows four consecutive holds at 5.25 per cent. The move, triggered by the El Niño-hit monsoon and elevated inflationary pressures and rising energy costs have been triggers for this move by the RBI though many feel that it has been on expected lines. 

The prevailing inflationary pressures and geopolitical uncertainty brought on by the Gulf conflict are also the main reasons for this move. The rate hike will put pressure on consumer sentiment and discretionary spending.

Experts feel that RBI has bitten the repo rate increase bullet as inflation print and rising crude prices amid sustained geopolitical events are now posing a challenge to growth estimates. The stance of further movements being likely towards a pause and hike rather than a cut in repo is indicative of the change in sentiment.

“Rising inflationary pressures as CPI inflation rose to 4.82 per cent in August, well above the threshold and an accelerating food inflation for the seventh straight month were likely factors that impacted the rate hike decision. The move is a pre-emptive measure to account for further inflation peaks later in the year, projected at 5.2 per cent for CPI inflation for the current year and 5.7 per cent for the next,” remarked Lata Pillai, Senior Managing Director and Head Capital Markets, India, JLL.

Experts feel that the strength of the economy, in fact has provided the RBI room to act, with real GDP for Q1 FY27 coming in strong at 7.8 per cent, ahead of the RBI’s projection and up from 6.9 per cent a year earlier. The RBI’s projected FY27 real GDP growth now stands at 7.1 per cent, higher by 40 bps compared to the previous meeting. This underscores the resilience in domestic economy.

“While the growth provides the cushion, rising energy and commodity costs and a sub-average monsoon are potential headwinds for forecasts. A sub-average monsoon on account of El Niño is likely to impact food prices and is a vital reason for the RBI to maintain a vigilant stance on inflation even after this hike. The current rate hike also comes in the wake of global tightening, with rate hikes seen from the ECB, BoJ and the Fed. The weakening rupee, with foreign portfolio money flowing out from Indian equities, has also forced the RBI’s hand along with the rise in crude prices, with the current hike seen as a defence against rupee depreciation and imported-inflation pressure, even as the FCNR-B deposits success has been a positive sign to support inflows,” added Pillai.

Experts feel that for real estate, the rate certainty of the past year is likely coming to an end. It is expected that floating home rates will be repriced and higher construction costs will be passed onto the buyers, with mid-segment affordability likely to remain under the scanner. Demand fundamentals remain strong, and robust GDP growth, growing investments and a healthy construction sector are likely to absorb the negative impact. The pace and extent of any further rate hikes are likely to matter more to the overall market than a single 25 bps hike. Overall, this is a measured move in tandem with global movements and will be felt in EMIs and construction costs, but the overall direction and extent of the tightening will be more relevant for the sector.

“The RBI's 25 bps rate hike reflects a calibrated balancing of inflation risks against an increasingly uncertain global financial condition. The central bank has acknowledged the need to anchor inflation expectations amid higher food and commodity prices, to also contain the second-round inflation effects. For bond markets, this measured move is largely in line with expectations and should help reinforce policy credibility,” said Rahul Goswami, CIO and MD, India Fixed Income, Franklin Templeton.

At the same time, it is expected that the festive season is a key period for housing demand, and an increase in borrowing costs will affect buyer sentiment. Residential prices in the top 7 cities have already risen significantly, stretching affordability. As per Anarock Research data, average residential prices increased 7 per cent y-o-y. With the rate hike, dearer home loans will make buyers more selective and cause decision timelines to extend, particularly in the price-sensitive segments. As per Anarock data, Q3 2026 recorded approx. 1,00,220 housing sales across the top 7 cities, up 3 per cent y-o-y and 10 per cent q-o-q. Affordable housing comprised a 16 per cent share of these sales.

“This momentum will now be tested because even a modest increase in EMIs will result in deferred purchase decisions or budget recalculations among affordable housing buyers. The rate hike is unlikely to have a direct impact on commercial real estate, which continues to be driven by structural demand from GCCs, technology, BFSI and other occupier segments. However, retail real estate may see some near-term impact. Higher financing costs coupled with the possibility of softer festive consumption could make developers and investors more cautious. Some new mall projects could potentially be deferred until there is greater clarity on demand,” observed Anuj Puri, Chairman, ANAROCK Group.

Few experts feel that the upward revision of the FY27 growth outlook to 7.1 per cent reinforces the strength and resilience of India’s underlying economic momentum. “Credit demand remains healthy across segments, with MSMEs in particular likely to remain an important engine of economic activity as businesses expand, invest and strengthen their operations,” pointed out Vinod Francis, SGM and Chief Financial Officer, South Indian Bank.