The Reserve Bank of India’s Monetary Policy Committee raised the policy repo rate by 25 basis points on October 7, marking the first rate hike in more than three years as rising inflation risks and strong domestic economic activity prompted a shift towards tighter monetary conditions.

The RBI raised its inflation forecast for the year to 5.2 percent from the 5 percent projection made in August. The central bank indicated that inflation risks have become less benign, with headline consumer price inflation expected to average around 5.8 percent over the next three quarters and core inflation projected at 4.4 percent for the year.

Economists expect the latest rate increase could be followed by additional hikes during the current financial year. Radhika Piplani, Chief Economist at Motilal Oswal Financial Services, expects two more 25 basis points increases this fiscal and three additional hikes over the current cycle, taking the repo rate to 6.25 percent before a pause.

Madhavi Arora, Chief Economist at Emkay Global, also expects another 50 basis points of tightening this fiscal. She said higher inflation was the primary factor behind the latest policy decision, while global financial conditions are increasingly influencing the RBI’s policy response.

Persistent inflation, elevated crude oil prices, high US interest rates and subdued natural dollar inflows could require India to maintain a higher risk premium, according to Arora. The US Federal Reserve had raised its policy rate by 25 basis points to 4 percent in September, marking its first rate increase in more than three years.

Higher US interest rates can make dollar-denominated assets more attractive to global investors and reduce the relative appeal of emerging markets. A higher Indian policy rate can help preserve the yield differential between Indian assets and US Treasuries, potentially supporting foreign portfolio flows and limiting pressure on the rupee.

RBI Governor Sanjay Malhotra said the central bank would support the orderly movement of the rupee and work towards ensuring that currency movements do not become excessively volatile.

Bond markets could also face pressure from the tightening cycle. Economists expect the benchmark 10-year government bond yield to rise to around 7.5 percent over the next six months from approximately 7.2 percent currently.

Manoranjan Sharma, Chief Economist at Infomerics Ratings, said stronger economic growth provides room for monetary tightening, but the simultaneous upward revisions to inflation highlight the challenge facing policymakers. The RBI needs to preserve economic momentum while preventing temporary price pressures from becoming entrenched in inflation expectations.

Sharma also highlighted crude oil volatility, geopolitical disruptions, El Niño risks and weak monsoon conditions as factors requiring continued vigilance. He said monetary tightening cannot directly address supply-side constraints such as inadequate rainfall or energy shortages, but can act as insurance against these shocks spreading into broader inflation.

The real estate sector is likely to experience a modest increase in financing costs following the rate hike. Higher borrowing costs could encourage investors and developers to become more selective, with greater preference for quality assets, credible sponsors and projects with strong cash-flow visibility.

Chanakya Chakravarti, a global real estate investor and capital strategist, said capital allocation could increasingly favour projects with stronger fundamentals rather than those dependent on inexpensive debt.

The latest policy decision therefore creates a more challenging interest-rate environment for borrowers and interest-sensitive sectors, while potentially supporting currency stability and inflation management. The direction of crude oil prices, domestic inflation and global financial conditions will remain key factors in determining whether the RBI continues with further rate increases.