Bank stocks recover from early lows after RBI raises repo rate by 25 bps
The six-member MPC unanimously voted to increase the repo rate under the liquidity adjustment facility (LAF) to 5.50%. Consequently, the Standing Deposit Facility (SDF) rate was raised to 5.25%, while the Marginal Standing Facility (MSF) rate and Bank Rate were increased to 5.75%. The MPC also changed its policy stance to calibrated tightening.
Following the announcement, the Nifty Bank index recovered from its intraday low and traded 0.07% higher at 55,166.70. The index had declined to an intraday low of 54,636.20 before recovering into positive territory.
Canara Bank rose 0.83%, followed by Punjab National Bank (+0.38%), Axis Bank (+0.34%) and ICICI Bank (+0.21%). State Bank of India declined 0.27%, Bank of Baroda fell 0.37%, HDFC Bank slipped 0.53%, Yes Bank declined 0.77%, AU Small Finance Bank shed 0.78%, IDFC First Bank fell 1.36% and IndusInd Bank declined 1.61%.
The RBI said the global economic outlook remains challenging due to the re-escalation of the West Asia conflict and volatility in crude oil prices. It also flagged tighter global financial conditions, elevated AI-related asset valuations and high public debt as downside risks to global growth.
The central bank said the Indian economy remained resilient, with real GDP growth in Q1 FY27 at 7.8%, supported by private consumption, fixed investment, a rebound in merchandise exports and sustained services exports. Manufacturing activity remained robust, while services activity strengthened on buoyant domestic and external demand.
For Q2 FY27, high-frequency indicators for July-August indicated sustained momentum in domestic economic activity. The RBI said domestic demand remained resilient, while merchandise exports recorded double-digit growth.
The RBI raised its FY27 real GDP growth forecast to 7.1% from 6.7% projected in the August policy review, with the Q2 and Q3 growth forecasts revised upward to 7.2% and 6.9%, respectively, from 6.4% and 6.5%. The Q4 projection was retained at 6.8%, while the Q1 FY28 forecast was lowered to 7.1% from 7.3%. Risks to the growth outlook were assessed as evenly balanced.
CPI inflation increased to 4.8% in August 2026 from 4.5% in July, driven mainly by higher food and fuel inflation. Core inflation also increased to 4.2%, while core inflation excluding precious metals stood at 2.9%.
The RBI raised its FY27 CPI inflation forecast to 5.2% from 5.0%. The projections for Q2, Q3 and Q4 were increased to 4.9%, 6.0% and 5.7%, respectively, from 4.7%, 5.9% and 5.5%. The Q1 FY28 inflation forecast was raised to 5.6% from 5.3%, while the FY27 core inflation forecast was increased to 4.4% from 4.3%.
The central bank said the near-term inflation outlook remained under pressure from the deficient monsoon, ongoing El Ni?o conditions and elevated energy and other commodity prices. It also noted that the pass-through of these pressures was still continuing.
The MPC said inflation and its outlook were no longer as benign as they were last year, with headline CPI inflation expected to average almost 5.8% over the next three quarters and core inflation projected at 4.4% for FY27. It said recalibrating the policy rate was therefore necessary.
The RBI said monetary policy would primarily work to contain second-round effects of supply-side inflation, including inflation expectations and firm-level pricing behaviour. It also noted limited evidence of demand-side pressures, although risks remained from strong growth in monetary and credit aggregates.
The MPC unanimously voted for the 25-basis-point rate increase and the shift to calibrated tightening. The RBI said the stance signals that rate cuts are off the table in the near term, while future policy action would depend on evolving growth and inflation conditions. Two members, Dr. Nagesh Kumar and Prof. Ram Singh, favoured retaining the neutral stance.
The minutes of the MPC meeting will be published on 21 October 2026. The next MPC meeting is scheduled for 2 to 4 December 2026.
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