India’s central bank raised interest rates by 25 basis points to 5.50% on Wednesday, its first hike since 2023, as rising inflation, higher oil prices and a weakened rupee put pressure on the economy.
The Reserve Bank of India (RBI) said its six-member monetary policy committee unanimously approved the increase in the benchmark repurchase rate, shifting its policy stance to “calibrated tightening”.
RBI governor Sanjay Malhotra said inflation and its outlook were no longer as benign as they had been last year, with signs that price pressures were spreading beyond food and transport.
Retail inflation rose to 4.8% in August, marking the third consecutive month above the RBI’s medium-term target of 4%.
The central bank had kept rates unchanged since the outbreak of the Iran war in February while assessing the impact of volatile oil prices on India’s economy.
Resilient gross domestic product growth in the latest quarter has now given the RBI greater scope to focus on inflation risks, particularly as India imports most of its energy and a weak monsoon threatens to push up food prices.
Malhotra said rate cuts were off the table in the near term, with future policy decisions likely to involve either another hike or a pause depending on economic conditions.
Analysts expect further tightening, with Garima Kapoor of Elara Capital saying there could be another 50 basis points of rate hikes during the current cycle.
The RBI is also facing pressure from the Indian rupee, which has traded near record lows over the past week.
The central bank has introduced measures to attract dollar inflows, including a deposit scheme for the Indian diaspora that has raised around US$127 billion, helping to stem some of the currency’s losses.
However, the rupee remains under pressure as foreign investors continue selling Indian equities while crude oil prices hover around US$100 a barrel.
India, the world’s third-largest oil buyer, normally sources about half of its crude through the Strait of Hormuz, which has been effectively closed since the start of the Middle East conflict.
Higher crude and fertiliser prices could therefore further increase India’s import bill and add to inflationary pressure.
