The Reserve Bank of India’s (RBI) decision to raise the repo rate by 25 basis points has raised concerns among renewable energy developers over higher financing costs and their potential impact on project economics.

The RBI raised the policy repo rate under the liquidity adjustment facility from 5.25% to 5.50%.

Explaining its decision, the RBI cited the re-escalation of the West Asia conflict in September and the resulting hardening and volatility in global crude oil prices, which have weakened global economic sentiment and heightened financial market volatility.

The central bank said global growth is projected to decelerate in 2026 from the previous year. Rising energy costs and food prices are expected to push global inflation sharply higher, prompting monetary policy tightening by major central banks.

This is the first interest rate hike in over three years. In 2025, the RBI had cut interest rates by 50 basis points.

Impact on Renewable Energy

The repo rate hike adds to cost pressures for renewable energy developers, who are already facing higher solar module prices amid the implementation of the Approved List of Models and Manufacturers for solar cells (ALMM List-II) and volatility in wafer prices in China.

Higher interest rates could also raise the effective cost of imported renewable energy components and manufacturing equipment, particularly for developers and manufacturers dependent on overseas suppliers.

The impact of the interest rate hike is expected to hit smaller companies more. Residential rooftop solar could also become more expensive as consumers’ monthly loan installments are likely to rise. Renewable energy projects are capital-intensive and rely substantially on long-tenor debt. Higher borrowing costs can affect project cash flows and equity returns, particularly for projects where tariffs have already been locked in.

Industry stakeholders said the monetary tightening move could indicate a potential cycle of rate increases. The central bank indicated as much when it said, “Given the current conditions, rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook.”

Power and infrastructure projects are financed largely through long-tenor debt, so the cost of capital flows directly into the cost of electricity,” Arman Puri, Director, Hindustan Power said.

A 25-basis-point increase on its own is absorbable and does not fundamentally alter project economics. However, developers will have to factor a higher interest-rate environment into upcoming bids and financing plans, he added.

Near-Term Impact

Anand Kabra, Chairman and Managing Director of Kabra ExtrusionTechnik & Geon, said the repo rate increase could affect the pace of renewable energy investments in the near term as developers reassess project economics amid higher financing costs.

He expects the capital expenditure cycle to slow temporarily, with some projects potentially being deferred while developers reassess funding plans and project timelines.

However, he said the slowdown in project activity is likely to be temporary rather than a change in the sector’s broader growth trajectory.

Sandeep Arora, Chief Financial Officer at Oyster Renewable, said the repo rate hike is likely to create a more cautious interest-rate environment, putting near-term pressure on financing costs for capital-intensive renewable energy projects.

However, he remained optimistic about the sector’s outlook, noting that industrial demand for reliable and cost-competitive clean power continues to grow, while long-term contracted revenues provide well-structured projects with resilience across interest-rate cycles.

Sandesh Naik, CFO, AB Energia, said that a 25-basis-point hike to 5.5% will add some pressure on working-capital and project financing costs.

As project volumes increase, EPC players can benefit from better procurement, standardization and execution efficiencies, helping offset cost pressures and making renewable projects increasingly competitive.

Higher interest rates could also affect debt-funded commercial and industrial (C&I) and rooftop solar installations by extending customer payback periods.

Hanish Gupta, Founder and Managing Director at Sunkind India, sees limited impact for projects financed through customers’ own funds. Developers would need to focus on disciplined project costs, timely execution, and competitive financing to preserve these savings for customers.

Mayur Misra, Director & CEO, Corrit, said that for C&I solar projects, higher financing costs could marginally extend payback periods, especially for businesses evaluating projects primarily on near-term returns. “For MSMEs and smaller companies, where access to competitive finance is already a concern, the impact could be more pronounced. Residential rooftop projects may also feel the pressure if higher lending rates push up monthly EMIs for customers financing their installations.”

However, he added that the rate hike does not fundamentally alter the long-term case for rooftop and C&I solar.

Last year, RBI increased the lending limit for the renewable energy sector in its new guidelines for priority sector lending, set to take effect from April 1, 2025. The limit on bank loans was increased to ₹350 million (~$4.08 million) for renewable energy-based generators.