The Reserve Bank of India has raised the repo rate to 5.50 per cent. Here is what the decision means and why it was taken.

The repo rate is the interest rate at which the RBI lends money to commercial banks. When it rises, banks' borrowing costs go up, and they usually pass this on to customers through higher interest rates on home, car and personal loans. Existing borrowers on floating rates may see their EMIs increase.

The RBI acted because inflation is no longer benign. Consumer inflation hit 4.82 per cent in August, above the bank's 4 per cent target for the third straight month, driven by higher oil prices linked to the Iran war and weak monsoon rains. The bank now expects 5.2 per cent inflation for the year.

The shift from a "neutral" stance to "calibrated tightening" is a hawkish signal. It means the central bank is leaning towards keeping policy tight and has ruled out rate cuts for now, leaving room for further hikes if prices keep rising.

The good news: the RBI also raised its growth forecast to 7.1 per cent, signalling a strong economy that can absorb higher rates.