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 stem rising inflation.
The central bank raised its benchmark repo rate by 25 basis points to 5.50%, the highest level in a year, in line with economists’ forecasts polled by Reuters.
In a speech on Wednesday, RBI Governor Sanjay Malhotra said India’s economic growth remained strong despite global challenges, adding that “inflation and its outlook are not as benign as they were last year.”
Malhotra said the Monetary Policy Committee has decided to change the policy stance to “calibrated tightening”.
The hike comes as India’s retail inflation rate has risen for 10 consecutive months, reaching 4.8% in August, above the RBI’s medium-term target of 4%.
“Given the current situation, a rate cut is off the table in the short term, and the only possible future policy measures are either a rate hike or a credit holiday,” Malhotra said. HSBC and Goldman Sachs expect the RBI to raise interest rates as soon as December.
HSBC said in a note on Monday that markets need to see “credible” rate hikes from India’s central bank indicating its ability to raise rates again to curb inflation. The report said that if the Reserve Bank of India’s interest rate hikes are “considered dovish at this time” at a time when inflation is rising and is likely to continue, it could undermine India’s attractiveness among global investors.
India remains the world’s fastest-growing major economy, but one of the countries most vulnerable to supply disruptions from the Iran war. The South Asian country meets almost 85% of its fuel needs through imports, and the Strait of Hormuz was the main supply route before the war.
India faces the risk of El Niño again this year. India’s June-August period is the fourth driest since 1960, according to the World Bank, which could lead to higher food prices.
The World Bank said in a report on Tuesday that it expects India’s economic growth to slow to 7.1% in the fiscal year ending March 2027 from 7.8% a year earlier. The report said the country’s economic growth “outperformed expectations despite trade and geopolitical uncertainties” but will slow in coming quarters.
India reported a better-than-expected economic growth of 7.8% in the June quarter, while many major economies including the US, China and Japan saw growth slow due to unfavorable trade terms, geopolitical uncertainty and high energy prices.
Last month, the U.S. Federal Reserve raised interest rates for the first time in three years and hinted at the possibility of further hikes, while the Bank of Japan raised interest rates to a 31-year high as global energy prices pushed up inflation. Central banks in South Korea and Europe have also raised interest rates in the past two months.
