New Delhi: The Reserve Bank of India raised its benchmark interest rate by 25 basis points to 5.50 per cent Wednesday, its first increase in nearly four years, and signalled that further hikes could follow as rising inflation and a weakening currency prompt a policy pivot.
The six-member Monetary Policy Committee voted unanimously to raise the repo rate, the first such increase since Governor Sanjay Malhotra took office in December 2024. While the move was widely expected, the central bank sprang a surprise in shifting its stance towards “calibrated tightening”, effectively ruling out a rate cut in the near term.
“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,” Malhotra said announcing the MPC decisions.
The governor, however, cautioned, that the timing and extent of any further tightening would depend on the evolution of inflation and growth, particularly underlying price pressures and the extent to which supply shocks become embedded in the broader economy.
With the decision, India has joined major central banks in raising rates as higher oil prices triggered by the Iran war fuel inflation, squeeze purchasing power and weigh on currencies. Compounding the price pressures is weak rains linked to El Nino.
Inflation pressures have broadened even as economic activity remains resilient. Consumer-price inflation rose to 4.82 per cent in August – above the RBI’s 4 per cent medium-term target for a third consecutive month, while core inflation accelerated to 4.2 per cent.
The central bank said inflation risks were no longer as benign as they had been a year earlier, pointing to higher food and fuel prices, deficient monsoon rainfall, El Nino conditions and renewed volatility in international oil prices.
The RBI now expects headline inflation to average 5.2 per cent in the 2026-27 financial year, with inflation projected to rise to 6.0 per cent in the third quarter and 5.7 per cent in the fourth quarter.
“There are also early signs of inflation becoming generalised,” he said, citing a rise in core inflation and a larger share of the consumer price index basket recording elevated price increases.
Oil prices have emerged as a particular risk following the renewed escalation of the West Asia conflict. The Indian crude basket averaged USD 116.1 a barrel in September, up sharply from USD 82 in July, according to the RBI.
Food-price pressures have also broadened, with the central bank flagging sharp increases in sugar and onion prices and warning of early signs that inflation is becoming more widespread.
At the same time, the RBI raised its economic growth forecast for 2026-27 by 40 basis points to 7.1 per cent, after the economy expanded 7.8 per cent in the first quarter.
The RBI said activity remained resilient in the second quarter, although momentum had moderated. Manufacturing and services continued to expand, while indicators such as capital-goods production, credit growth and consumer spending remained supportive.
“The Indian economy has been strong, and the economic momentum remains broad-based,” Malhotra said, adding that the economy was expected to remain resilient despite global headwinds.
The central bank nevertheless warned that weaker monsoon rainfall, geopolitical tensions, elevated commodity prices, trade frictions and tighter global financial conditions could weigh on growth.
The RBI said monetary policy could not directly address supply shocks but could prevent them from becoming entrenched through inflation expectations and corporate pricing behaviour.
“While there is some evidence of elevated inflation expectations and generalisation of inflation, there are limited signs of supply side pressures getting embedded in pricing behaviour,” he said.
The central bank’s policy shift marks a balancing act between containing an increasingly broad inflation shock and preserving strong domestic growth. It said the duration and extent of the rate-hike cycle would depend on actual growth and inflation outcomes, particularly the persistence of underlying inflation and second-round effects from supply shocks.
Global risks have also intensified, with the RBI citing the West Asia conflict, elevated bond yields, trade uncertainty and risks of a sharp correction in AI-stock valuations as threats to the outlook.
“We shall strive for price and financial stability as both are essential for sustainable growth in the long run,” Malhotra said.
The rate decision comes as financial-system liquidity remains abundant and credit growth has accelerated.
Average daily surplus liquidity under the RBI’s liquidity adjustment framework reached Rs 5.9 lakh crore since the previous policy meeting, while bank credit growth accelerated to 18.1 per cent year-on-year as of September 15, compared with 10.4 per cent a year earlier.
The RBI said strong growth in monetary and credit aggregates represented an additional risk even though evidence of demand-side inflation pressures remained limited.
The central bank said it would use an appropriate mix of liquidity-management tools to align the weighted average call rate with the repo rate.
The RBI’s guidance effectively narrows the range of likely policy moves at upcoming meetings to either a pause or another rate increase.
“We continue to see 25-50 basis point of additional rate hikes going ahead, with further upside if global risks persist,” said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.
