A major move has been made by the MPC of the Reserve Bank of India as it increased the repo rate by 25 basis points (0.25%) to 5.50%. The stance of the policy has also been changed to 'calibrated tightening'.

While addressing the press conference after the announcement of the policy decision, RBI governor Sanjay Malhotra clarified about the decision to charge a MDR for UPI transactions and said, "The decision on MDR has already been taken. Till now, there has not been a decline in UPI volumes. As per me, a small fee will not affect UPI volumes." With this increase in the rate and its stance of calibrated tightening, the central bank has entered a new cycle of interest rate hikes and totally ruled out the possibility of a rate cut anytime soon.

With the introduction of the new framework for UPI from 15 October, an MDR of 0.4 percent will be charged for some P2M transactions above ₹2,000. The governor of RBI, Sanjay Malhotra, while clarifying this point, has assured that the nominal fee will not affect the pace of digital transactions.

According to clarifications from the government and the RBI, all person-to-person (P2P) transactions and merchant payments up to ₹2,000 will remain completely free. Consequently, approximately 96% of P2M transactions will remain unaffected. The maximum MDR for transactions of ₹75,000 or more has been set at ₹300. Transactions above ₹2,000 in essential sectors such as railways, telecom, insurance, fuel, and agricultural inputs will attract a flat MDR of just ₹5.

Retail inflation rose to 4.82 percent in August, and food inflation reached 5.9 percent, above the RBI's target of 4 percent. Inflation pressures have increased due to a weak monsoon, high global commodity prices (metals, food, and energy), and supply chain disruptions. To control this, the MPC increased the repo rate from 5.25 percent to 5.50 percent. By adopting a "calibrated tightening" approach, the RBI has closed the door to rate cuts and initiated a cycle of rate hikes. The central bank has raised its inflation forecast for the fiscal year 2026-27 to 5.2 percent.

Despite the interest rate hike, domestic economic activity remains strong. The RBI has raised its GDP growth forecast for the fiscal year 2026-27 by 40 basis points to 7.1 percent. According to Rajni Sinha, chief economist at CareAge Ratings, growth could reach 7.3 percent, but caution must be exercised against the indirect impact of global commodity prices and inflation. Hitesh Suvarna, economist at JM Financial, says that the narrowing of the India-US interest rate differential has put pressure on the capital account and reduced foreign exchange reserves by $38 billion in September 2026, forcing the RBI to raise rates earlier.

Lakshmi Venkataraman Venkatesan of BYST believes that given the increased liquidity from FCNR funds, the RBI may consider increasing the CRR (currently 3%) and SLR (currently 18%) by 25-50 bps in the future.

The increase in the repo rate will make bank borrowing more expensive, directly impacting working capital loans and loan installments for the MSME sector. According to Rajesh Sharma, MD of Capri Loans, and Rahul Singh, CIO of LIC Mutual Fund, higher rates may slightly reduce consumption, investment, and credit demand, but this step was necessary to maintain macroeconomic stability.

This RBI decision sends a message that while nominal MDR has been supported to make the digital payment ecosystem sustainable, strict monetary measures have been taken to control inflation. India is on track to achieve a growth rate of 7.1% on the back of strong domestic demand, even though the era of cheap loans has ended.

A major move has been made by the MPC of the Reserve Bank of India as it increased the repo rate by 25 basis points (0.25%) to 5.50%. The stance of the policy has also been changed to 'calibrated tightening'.

While addressing the press conference after the announcement of the policy decision, RBI governor Sanjay Malhotra clarified about the decision to charge a MDR for UPI transactions and said, "The decision on MDR has already been taken. Till now, there has not been a decline in UPI volumes. As per me, a small fee will not affect UPI volumes." With this increase in the rate and its stance of calibrated tightening, the central bank has entered a new cycle of interest rate hikes and totally ruled out the possibility of a rate cut anytime soon.

With the introduction of the new framework for UPI from 15 October, an MDR of 0.4 percent will be charged for some P2M transactions above ₹2,000. The governor of RBI, Sanjay Malhotra, while clarifying this point, has assured that the nominal fee will not affect the pace of digital transactions.

According to clarifications from the government and the RBI, all person-to-person (P2P) transactions and merchant payments up to ₹2,000 will remain completely free. Consequently, approximately 96% of P2M transactions will remain unaffected. The maximum MDR for transactions of ₹75,000 or more has been set at ₹300. Transactions above ₹2,000 in essential sectors such as railways, telecom, insurance, fuel, and agricultural inputs will attract a flat MDR of just ₹5.

Retail inflation rose to 4.82 percent in August, and food inflation reached 5.9 percent, above the RBI's target of 4 percent. Inflation pressures have increased due to a weak monsoon, high global commodity prices (metals, food, and energy), and supply chain disruptions. To control this, the MPC increased the repo rate from 5.25 percent to 5.50 percent. By adopting a "calibrated tightening" approach, the RBI has closed the door to rate cuts and initiated a cycle of rate hikes. The central bank has raised its inflation forecast for the fiscal year 2026-27 to 5.2 percent.

Despite the interest rate hike, domestic economic activity remains strong. The RBI has raised its GDP growth forecast for the fiscal year 2026-27 by 40 basis points to 7.1 percent. According to Rajni Sinha, chief economist at CareAge Ratings, growth could reach 7.3 percent, but caution must be exercised against the indirect impact of global commodity prices and inflation. Hitesh Suvarna, economist at JM Financial, says that the narrowing of the India-US interest rate differential has put pressure on the capital account and reduced foreign exchange reserves by $38 billion in September 2026, forcing the RBI to raise rates earlier.

Lakshmi Venkataraman Venkatesan of BYST believes that given the increased liquidity from FCNR funds, the RBI may consider increasing the CRR (currently 3%) and SLR (currently 18%) by 25-50 bps in the future.

The increase in the repo rate will make bank borrowing more expensive, directly impacting working capital loans and loan installments for the MSME sector. According to Rajesh Sharma, MD of Capri Loans, and Rahul Singh, CIO of LIC Mutual Fund, higher rates may slightly reduce consumption, investment, and credit demand, but this step was necessary to maintain macroeconomic stability.

This RBI decision sends a message that while nominal MDR has been supported to make the digital payment ecosystem sustainable, strict monetary measures have been taken to control inflation. India is on track to achieve a growth rate of 7.1% on the back of strong domestic demand, even though the era of cheap loans has ended.