RBI pumps ₹2.5 lakh crore into banks despite rate hike: Why loans may get costlier but not scarcer

The Reserve Bank of India's (RBI) decision to raise the repo rate to 5.50% while simultaneously injecting ₹2.5 lakh crore into the banking system has raised questions about its monetary policy direction. While higher interest rates typically make loans costlier, additional liquidity ensures banks have sufficient funds to continue lending.

According to lending expert Joydip Gupta, the two measures serve fundamentally different purposes and should not be interpreted as conflicting policy signals.

"They act on two different things. The repo rate sets the cost of funds. Liquidity ensures enough cash is available in the short term," Gupta, Head APAC, Scienaptic AI, told Business Today.

The RBI's Monetary Policy Committee (MPC) raised the repo rate by 25 basis points on October 7, 2026, marking its first increase since February 2023. The committee also shifted its policy stance to calibrated tightening.

Why is RBI injecting liquidity despite raising rates?

Gupta explained that a central bank can increase borrowing costs while ensuring sufficient liquidity to prevent short-term funding shortages.

"A central bank can say money should cost more while making sure no bank runs short of cash this holiday season," he said.

However, he cautioned that such liquidity support should not be confused with a permanent increase in funds available to banks.

"That is temporary cash, not durable liquidity," Gupta added.

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For lenders, this means funding costs may rise even as short-term availability of money remains relatively comfortable.

Will loans become harder to obtain?

Gupta believes higher interest rates will not necessarily translate into reduced credit availability. Instead, banks and financial institutions may become more selective about borrowers.

"Credit does not get scarcer. It gets distributed more precisely, and the quality of that precision is an underwriting question," he said.

As interest rates increase, lenders may tighten eligibility requirements, strengthen documentation checks and prioritise borrowers with established repayment histories.

First-time borrowers and individuals with limited credit histories could face greater scrutiny.

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What happens to existing borrowers?

According to Gupta, borrowers with floating-rate loans will generally experience the impact first, depending on their loan reset schedules.

Existing floating-rate borrowers could see changes within approximately three months, while new borrowers may face revised rates when their loans are sanctioned.

Fixed-rate borrowers and customers of non-banking financial companies may experience the impact later as higher funding costs gradually filter through.

Gupta said a single 25-basis-point increase may have a relatively modest monthly impact.

However, the direction of future interest rate decisions will matter more for borrowers.

The RBI's next MPC meeting, scheduled for December 2–4, will therefore be closely watched for indications of whether October's increase signals the beginning of a sustained tightening cycle.

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