Why did India restart rate hikes despite stronger growth?

The Reserve Bank of India raised the repo rate by 25 basis points to 5.50%, its first increase since February 2023, and changed its stance from neutral to calibrated tightening.[5][6] It simultaneously lifted its FY27 growth projection from 6.7% to 7.1% and its inflation forecast from 5% to 5.2%.[6] Why it matters: The increase can raise payments on benchmark-linked home, personal and vehicle loans, while potentially supporting deposit rates.[6] It also shows how an energy-importing economy can tighten policy even during strong growth when oil, food prices, currency weakness and global yields threaten inflation and capital flows.[5][6] Key insights: Retail inflation reached 4.82% in August, exceeding the RBI’s 4% medium-term target for a third month while remaining inside its 2%-6% tolerance band.[6] | Crude above $100 a barrel raises imported-inflation and external-balance risks for India, which imports most of its energy.[5][6] | The India-US 10-year yield gap narrowed to 189 basis points, potentially making US assets more attractive and adding pressure on the rupee.[5] | About $133 billion attracted through a foreign-currency deposit initiative added banking-system liquidity; the RBI has already drained more than ₹1 lakh crore, or $10.4 billion, through bond sales and other measures.[5] Cheatsheet facts: What changed: The repo rate rose 25 basis points to 5.50%, and the RBI shifted from a neutral stance to calibrated tightening.[5][6] | Why now: Oil above $100, a weaker rupee, poor monsoon conditions and rising inflation have increased price risks despite strong economic activity.[5][6] | Watch next: Monitor banks’ lending and deposit-rate changes, along with RBI operations to absorb remaining excess liquidity.[5][6]