The Indian benchmark indices ended lower on Wednesday after the Reserve Bank of India (RBI) increased the repo rate to 5.50% as the Sensex fell 429 points to end at 72,638 and the Nifty ended 173 points lower to close trade at 22,603 at 3:30 PM.
RBI MPC Decision
The Reserve Bank of India on Wednesday raised its benchmark interest rate by 25 basis points to 5.50 per cent, marking its first rate increase in nearly four years and signalling a shift towards tighter monetary policy amid rising inflation and a weakening rupee.
The six-member Monetary Policy Committee voted unanimously in favour of the hike, the first such increase since Governor Sanjay Malhotra took office in December 2024.
While the rate hike was widely expected, the RBI surprised markets by shifting its policy stance towards “calibrated tightening”, effectively ruling out a rate cut in the near term.
RBI Signals Pause Or Further Rate Hikes
Announcing the MPC decisions, Malhotra said rate cuts were off the table in the near term and that future policy action could only involve a rate hike or a pause, depending on evolving conditions and the outlook.
“Rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook,” Malhotra said.
The policy shift comes against the backdrop of rising food prices, elevated global crude prices, higher global and domestic bond yields and depreciation in the rupee.
Brent crude, the global oil benchmark, was trading 0.98 per cent higher at USD 101.5 per barrel.
‘Extraordinary Circumstances’ Behind Rate Hike
Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Group, said the RBI’s decision was a close one and was driven by a combination of domestic and external pressures.
“The RBI’s 25 basis point hike was, in our assessment, a touch-and-go decision shaped by extraordinary circumstances. Resilient domestic growth provided room to act, while rising food prices, elevated global crude prices, higher global and domestic bond yields and rupee depreciation weighed heavily in favour of tightening,” Hajra said.
He added that the move did not necessarily signal a series of further rate hikes, with the calibrated tightening stance still leaving room for a pause depending on inflation and external pressures.
“With the move fully priced in, we do not expect a negative financial-market impact. Indeed, the RBI’s willingness to take a difficult decision should reassure markets about its commitment to price stability and strengthen confidence in its management of an unusually challenging environment,” Hajra said.
FII Selling, Global Markets In Focus
Foreign Institutional Investors (FIIs) offloaded equities worth Rs 2,961.30 crore on Tuesday, according to exchange data.
In Asian markets, South Korea’s Kospi, Japan’s Nikkei 225 index and the Hang Seng index quoted lower. US markets, meanwhile, ended higher on Tuesday.
The domestic equity market had closed higher in the previous session. The Sensex jumped 685.34 points, or 0.95 per cent, to settle at 73,067.81 on Tuesday, while the Nifty climbed 220.35 points, or 0.98 per cent, to end at 22,776.10.
With the RBI now signalling that the next move can only be a hike or a pause, the trajectory of inflation, crude oil prices, the rupee and global bond yields will remain key factors for the central bank’s policy decisions ahead.
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