As the Reserve Bank of India (RBI) raises the repo rate to 5.5%, former NITI Aayog Vice Chairman Rajiv Kumar emphasizes that India’s path to double-digit growth hinges on shifting from state-led to private-driven investment. He warns that higher borrowing costs could create a divide, where smaller firms struggle to expand while larger corporations maintain momentum.
The Reserve Bank of India (RBI) hiked the repo rate by 25 basis points to 5.50% on Wednesday, October 7, 2026, citing inflationary pressures and global uncertainties. Following this development, former NITI Aayog Vice Chairman Rajiv Kumar highlighted a critical tension for the economy: while the government has set a public capital expenditure target of Rs 12.2 lakh crore for the current fiscal year to support growth, the burden of higher borrowing costs is falling heavily on the private sector.
Rajiv Kumar argues that for India to reach double-digit growth, the government must transition from a 'regulatory' state—focused on oversight and compliance—to a 'promotional' state. This shift would prioritize predictability in policy and streamline the business environment, reducing the hurdles that currently delay private projects. He suggests that the ultimate success of this transition depends on better coordination between the Centre and state governments to create a unified investment climate.
One of the central risks identified in this economic environment is the potential for an uneven recovery, often referred to as a 'K-shaped' trend. While large corporations appear capable of absorbing higher capital costs, small and medium-sized enterprises (SMEs) are feeling the pressure of increased interest rates. Since borrowing becomes more expensive, these smaller firms may find it difficult to fund expansion or manage working capital, potentially stifling the broad-based growth needed to achieve the RBI’s revised FY27 GDP growth forecast of 7.1%.
Data indicates that private sector capital expenditure is expected to reach Rs 3.2 lakh crore in FY27, an improvement from previous years. However, this level of investment is still considered critical for balancing the heavy public spending. The challenge lies in ensuring that high interest rates do not dampen the appetite of private players who are essential for filling the gap left by government infrastructure projects.
Investors may keep a close watch on how businesses manage the rising cost of debt in the coming quarters. Profit margins in sectors heavily reliant on borrowing could come under pressure if high interest rates persist. Furthermore, the ability of state governments to clear regulatory bottlenecks will be an important factor for firms attempting to move ahead with new projects. The next few months of corporate commentary and credit offtake data from banks will be key indicators of whether the private sector can maintain its investment pace despite the current monetary tightening.