The Reserve Bank of India on Wednesday raised interest rates for the first time since 2023, joining several major central banks in tightening monetary policy to arrest accelerating inflation.
The central bank increased the benchmark repo rate by 25 basis points to a 1-year high of 5.50%, in line with expectations of economists polled by Reuters.
India’s economic growth has been strong despite global challenges, Sanjay Malhotra, RBI governor, said in his address on Wednesday, while adding that “inflation and its outlook are not benign, as they were last year.”
The monetary policy committee decided to change the policy stance “to calibrated tightening,” Malhotra said.
The hike comes as retail inflation in India has been on the rise for 10 straight months, touching 4.8% in August, higher than the RBI’s medium-term target of 4%.
“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,” Malhotra said. HSBC and Goldman Sachs expect the RBI to raise interest rates in December as well.
The markets need to see a “credible” hike from India’s central bank that shows its ability to raise rates again to contain inflation, HSBC said in a report on Monday. If the RBI’s rate hike is “perceived as dovish at a time” when inflation is rising and likely to persist, it would hurt India’s appeal among global investors, the report said.
India, which remains the world’s fastest-growing major economy, is among the countries most vulnerable to the supply disruptions caused by the Iran war. The South Asian country meets nearly 85% of its fuel needs via imports, with the Strait of Hormuz being a key supply route before the war.
India is also facing the risk of El Niño this year. As per the World Bank, India had its fourth-driest June-August period since 1960, and it could lead to higher food prices.
The World Bank expects India’s economic growth to slow to 7.1% in the financial year ending March 2027 as compared to 7.8% in the previous year, it said in a report on Tuesday. The report said the country’s economic growth held up “better than expected despite trade and geopolitical uncertainties,” but will moderate over the next few quarters.
During the June quarter, India reported a better-than-expected economic expansion of 7.8%, even as growth cooled for many major economies such as the U.S., China and Japan due to adverse trade conditions, geopolitical uncertainties and high energy prices.
Last month, the U.S. Fed raised interest rates for the first time more than three years and indicated another hike could follow, while the Bank of Japan raised interest rates to a 31-year high as global energy prices push inflation higher. The South Korean and European central banks have also raised interest rates in the last two months.
