The Reserve Bank of India on Wednesday increased its benchmark interest rate by 25 basis points to 5.50%, the first such hike since 2023. RBI Governor Sanjay Malhotra cited concerns over rising inflation as the primary reason for the Monetary Policy Committee’s decision.
The decision raises the repo rate, the rate at which the central bank lends to commercial banks, to its highest level in one year. Governor Malhotra announced the Monetary Policy Committee also shifted its policy stance to “calibrated tightening.” The move was in line with the forecasts of economists in a Reuters poll.
In a statement following the announcement, Malhotra said that while “India’s economic growth has been strong despite global challenges,” the outlook on consumer prices required action. He added, “inflation and its outlook are not benign, as they were last year.”
The rate increase follows a period of rising consumer prices. According to official data, India’s retail inflation reached 4.8% in August, exceeding the central bank’s medium-term target of 4%. The August figure marked the 10th consecutive month that inflation has risen.
Speaking on future policy, Malhotra stated, “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.”
The World Bank, in a report released Tuesday, projected India’s economic growth will slow to 7.1% in the fiscal year ending March 2027, down from 7.8% the previous year. The report said the country’s economic expansion had “held up better than expected despite trade and geopolitical uncertainties,” but will moderate.
The bank also cited potential pressures on food prices, noting that India experienced its fourth-driest June-August period since 1960, which it stated could lead to higher food prices. According to government figures, India imports approximately 85% of its crude oil needs, exposing the economy to shifts in global energy prices.
With this decision, the RBI joins other major central banks that have been tightening monetary policy. In recent months, central banks including the U.S. Federal Reserve, the Bank of Japan, and the European Central Bank have also raised their key interest rates in response to inflationary pressures in their respective economies.
