RBI Repo Rate Hike: Banking and other rate-sensitive sectors saw a sharp reversal on October 7 after the Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 5.50 per cent and changed its policy stance to ‘calibrated tightening’.
At 10:25 AM, the Nifty Bank, which had fallen nearly 1 per cent in early trade, was up around 0.20 per cent. Kotak Mahindra Bank, Canara Bank and Punjab National Bank were among the key gainers.
The Nifty Financial Services index, which has significant exposure to NBFCs, also recovered from early losses and moved into positive territory after the RBI policy announcement.
Realty stocks saw a similar reversal. The Nifty Realty index, which was down around 1 per cent earlier, had narrowed its losses to about 0.20 per cent. The Nifty Auto index also recovered from its early lows but remained under pressure, down nearly 1 per cent.
The Nifty Private Bank and the Nifty PSU Bank indices also traded higher in the range 0.10-0.30 per cent.
Why RBI Shifted To 'Calibrated Tightening' And What It Means
RBI Governor Sanjay Malhotra said the renewed escalation in the West Asia conflict has hurt global economic sentiment and made the inflation outlook less comfortable than it was a year ago.
The MPC said the policy rate needs to be recalibrated to address these inflation risks. Four of the six MPC members backed a shift to a ‘calibrated tightening’ stance. The committee also signalled that a rate cut is unlikely in the near term.
‘Calibrated tightening’ means the RBI is prepared to raise rates further if inflationary pressures persist. The stance leaves room for policy action based on how inflation and growth evolve.
Arun Poddar, CEO of Choice International said the RBI policy decision "signals a shift towards a tightening cycle," adding that "it reflects a measured response to emerging inflationary pressures amid resilient growth.
"The change in stance also indicates that the central bank remains watchful of evolving domestic and global risks, particularly movements in crude oil prices and their potential impact on inflation," he said.
The RBI flagged strong gross domestic product (GDP) growth and rapid credit expansion as potential sources of demand-side pressure on CPI inflation. So far, it has not found much evidence of such pressure.
The committee said inflationary pressures are beginning to spread across more parts of the economy. It said the distinction between supply-side inflation and the second-round effects of an initial price shock has become harder to make.
According to the committee, policymakers need to account for these second-round effects when assessing the inflation impact of supply shocks.
GDP Growth Projection
The RBI has projected real GDP growth at 7.1 per cent for 2026-27, with growth expected at 7.2 per cent in the second quarter, 6.9 per cent in the third quarter and 6.8 per cent in the fourth quarter. For the first quarter of 2027-28, GDP growth is projected at 7.1 per cent.
Explaining the outlook, the MPC said high-frequency indicators for July and August point to "sustained momentum in domestic economic activity". It said domestic demand remains resilient and is supported by external demand, with merchandise exports recording double-digit growth.
The MPC expects services activity and stable employment conditions to support urban demand. It also sees "strong capacity utilisation, robust credit flows and the government’s thrust on infrastructure" supporting investment.
The committee, however, flagged risks from global uncertainty and the ongoing West Asia conflict. Energy prices and supply chain pressures remain uncertain, while a deficient south-west monsoon and strong El Niño conditions could weigh on agriculture and rural demand. The MPC said healthy foodgrain stocks and government measures should help contain the impact.
Inflation projection
The RBI has projected CPI inflation at 5.2 per cent for 2026-27, with inflation expected at 4.9 per cent in Q2, 6 per cent in Q3 and 5.7 per cent in Q4. CPI inflation for Q1 2027-28 is projected at 5.6 per cent. Core inflation is estimated at 4.4 per cent for 2026-27.
The MPC expects inflation to remain under pressure from the supply side. It cited the deficient monsoon, continuing El Niño conditions and high energy and commodity prices as key risks. The committee said the "pass through of which is still continuing".
The MPC said the inflation risks are "evenly balanced", but warned that supply-side pressures could keep inflation elevated in the coming quarters.
Stock Market Outlook: What To Watch Next
According to Poddar, "the focus will now be on the trajectory of inflation, liquidity and the evolving interest-rate environment. A calibrated and data-dependent approach by the RBI will be important in containing inflationary pressures while supporting sustainable economic growth.”
