The Reserve Bank of India is expected to raise borrowing costs on October 7, marking a cautious move reminiscent of past emergency measures during extreme currency pressure, as the economy navigates global inflation and financial stability challenges.
The Reserve Bank of India is expected to raise borrowing costs on October 7, with most economists looking for a 25 basis point increase that would lift the repo rate from 5.25% to 5.50%. Reuters said 35 of 61 economists surveyed expected that outcome, as policy-makers wrestled with firmer crude prices, higher global bond yields and renewed inflation worries. If delivered, it would be the first increase since February 2023.
That prospect may sound modest compared with one of the most forceful tightening episodes in India’s monetary history. In August 2000, the RBI’s short-term repo rate reached 16%, a level reached during severe pressure on the rupee and the country’s external accounts. The central bank had only introduced the Liquidity Adjustment Facility two months earlier, and repo and reverse-repo operations were being used primarily as short-term liquidity tools rather than as the main signalling rate familiar to markets today. According to the RBI’s own account of that period, the central bank relied on a broad mix of measures to steady the currency.
The background to that emergency was far more acute than today’s, even if some of the same themes are reappearing. The RBI said Brent crude averaged $32.97 a barrel in September 2000, up from $25.55 in December 1999 and $22.51 a year earlier, increasing India’s dollar requirement for oil imports and putting extra strain on the external balance. Foreign institutional investors also turned sellers, with the RBI recording a net outflow of $505 million between May and August 2000 after a first-quarter inflow of $948 million. At the same time, the US and Europe were tightening policy, reducing the appeal of Indian assets and worsening pressure on the rupee.
The central bank’s response was not limited to interest rates. It sold foreign exchange to meet part of the demand for dollars, raised the Bank Rate and the cash reserve ratio, and increased the cost of financing for imports and overdue export bills. It also lifted very short-term repo and reverse-repo rates to make speculative dollar positions less attractive, while adding additional reverse-repo auctions to absorb liquidity. The RBI later argued that rate rises alone could have done damage to the broader economy, which is why it chose several tools at once rather than depending on a single weapon.
Today’s policy debate is taking place in a different framework, but with familiar stress points. Reuters reported that the rupee touched a two-month low on October 6 as investors waited for the decision, while market participants priced in a quarter-point move. Even so, a rise to 5.50% would remain well below the levels seen in earlier tightening cycles. The RBI raised the repo rate to 6.25% in June 2018, cut it to 4.00% during the pandemic in 2020, and has since kept policy more measured. That contrast underlines how unusual the 16% level was: not a normal policy setting, but an emergency response to a currency shock.
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