Mumbai, Oct 7: The Reserve Bank of India (RBI) has raised its forecast for India’s economic growth in the financial year 2026-27 to 7.1 per cent, reflecting stronger-than-expected domestic activity. At the same time, the central bank has adopted a tighter policy approach as inflation risks have increased.

The RBI’s Monetary Policy Committee (MPC) raised the repo rate by 25 basis points to 5.50 per cent from 5.25 per cent. This is the first rate hike since February 2023. The MPC also changed its policy stance from neutral to calibrated tightening, signalling that controlling inflation has become a more important priority.

The higher growth forecast comes after India recorded 7.8 per cent GDP growth in the April-June quarter, showing that economic activity has remained strong despite global uncertainties. The RBI has also raised its growth forecast for the second quarter to 7.2 per cent and for the third quarter to 6.9 per cent, while retaining its fourth-quarter estimate at 6.8 per cent.

However, the central bank has also become more cautious about inflation. Its projection for FY27 CPI inflation has been raised to 5.2 per cent from 5 per cent. Higher crude oil prices and wider price pressures are among the factors adding to the inflation outlook.

RBI balances growth and inflation

The latest policy decision reflects the RBI’s attempt to balance two key concerns — maintaining economic momentum while keeping inflation under control.

Strong domestic consumption and economic activity have supported growth, giving the central bank room to focus more closely on price stability. At the same time, rising oil prices and global financial uncertainties could put additional pressure on inflation and the rupee.

The RBI’s decision is also important for borrowers and businesses. A higher repo rate can increase borrowing costs for banks and, in turn, affect interest rates on loans and other forms of credit.

RBI Governor Sanjay Malhotra has indicated that rate cuts are not on the table in the near term. Future policy action will depend on how inflation and economic conditions develop, with the next move likely to be either another hike or a pause.

The RBI’s latest projections therefore present a mixed picture: India’s growth outlook has strengthened, but inflation and global risks are prompting the central bank to take a more cautious approach to monetary policy.

The policy decision is also being closely watched by financial markets, as investors assess its impact on borrowing costs, the rupee, bond yields and equity markets.