RBI Hikes Repo Rate 25 Bps to 5.5%; FISME Urges Caution on MSME Credit Costs

New Delhi, Oct 7 (KNN) The Reserve Bank of India (RBI) on Wednesday raised the policy repo rate by 25 basis points (bps) to 5.5 per cent and shifted its monetary policy stance to calibrated tightening, citing rising inflation risks despite resilient growth.

The decision was taken unanimously by the six-member Monetary Policy Committee (MPC) at its October 5-7 meeting. The Standing Deposit Facility (SDF) rate now stands at 5.25 per cent, while the Marginal Standing Facility (MSF) rate and Bank Rate are at 5.75 per cent.

The RBI said the calibrated tightening stance means rate cuts are off the table in the near term, with future action likely to be limited to a rate hike or pause depending on growth and inflation trends.

MSME Body Flags Further Tightening

The Federation of Indian Micro and Small & Medium Enterprises (FISME) said, “The RBI needs to manage excess liquidity without making productive MSME credit indiscriminately expensive.”

FISME said the 25-bps increase was understandable given rising inflationary pressures, particularly from energy costs and geopolitical disruptions. However, it cautioned that MSMEs, which depend heavily on bank and NBFC credit, have limited ability to absorb or pass on higher financing costs.

With enterprises already facing elevated energy, freight and imported input costs, higher lending rates could create a double squeeze by increasing both production and working-capital costs.

FISME emphasised that the larger concern was the possibility of a prolonged tightening cycle, noting that much of the current inflation stems from supply-side and geopolitical factors that higher domestic interest rates cannot directly address.

It urged the RBI to keep any further tightening cautious and data-driven while protecting the flow of affordable credit to productive MSMEs. India, the MSME body said, still needs investment, capacity creation, exports and employment, and monetary policy should avoid raising the cost of creating productive capacity needed to contain inflation over the longer term.

Growth Outlook Remains Strong

The RBI retained its FY27 real GDP growth forecast at 7.1 per cent, with Q2, Q3 and Q4 growth projected at 7.2 per cent, 6.9 per cent and 6.8 per cent, respectively. Q1 FY28 growth is projected at 7.1 per cent.

Q1 FY27 GDP grew 7.8 per cent, supported by private consumption, investment, manufacturing and services. Strong credit growth, infrastructure spending and a revival in private capex are expected to support investment.

Risks include weak monsoon conditions, strong El Niño conditions, geopolitical tensions, elevated commodity prices and tighter global financial conditions.

Inflation Risks Prompt Rate Hike

CPI inflation rose to 4.8 per cent in August from 4.5 per cent in July, while core inflation increased to 4.2 per cent. Around 37 per cent of the CPI basket recorded inflation above 4 per cent.

The RBI projected FY27 CPI inflation at 5.2 per cent, with Q2 at 4.9 per cent, Q3 at 6 per cent and Q4 at 5.7 per cent. Core inflation is projected at 4.4 per cent.

The MPC said inflation is no longer as benign as last year, with headline inflation expected to average nearly 5.8 per cent over the next three quarters. While demand-side inflation remains limited, strong monetary and credit growth pose risks.

Global And External Risks

The RBI flagged renewed West Asia conflict, volatile crude prices, elevated global bond yields, trade uncertainty and tighter financial conditions as key risks, besides high public debt and elevated valuations of AI-related assets.

India's current account deficit remains manageable, supported by services exports and remittances. FDI inflows rose to USD 13.8 billion during April-August 2026 from USD 9.6 billion a year earlier, while forex reserves provide around 11 months of import cover.

Account Aggregator Interoperability

The RBI announced interoperability among NBFC Account Aggregators, allowing customers to access and share financial information through any NBFC-AA of their choice.

SEBI-regulated depositories will also be enabled to include bank deposit information in Consolidated Account Statements, allowing customers to view demat holdings and bank deposits together. Both measures are to be implemented by December 31, 2026.

The RBI will also constitute a Technical Consultative Committee for Financial Markets to engage market participants on policy and operational issues covering money, government securities, foreign exchange and related derivative markets.

(KNN Bureau)