India lifts policy rate to 5.50% in first increase since 2023

India’s central bank announced a 25-basis-point increase in its benchmark repurchase rate on October 7, taking it to 5.50%. The decision, supported by all six policy panel members, was its first rate increase since February 2023 and came amid inflation pressures from the Middle East conflict and weakness in the rupee.

Reserve Bank of India Governor Sanjay Malhotra said policymakers had moved to a calibrated tightening stance. He said cuts were ruled out for the near term; future decisions would involve either raising rates or holding them steady, according to changing conditions and the outlook.

Consumer inflation climbed to 4.8% in August, exceeding the RBI’s 4% medium-term goal for a third month running. Data pointed to price pressures spreading into categories other than food and transport. A weak monsoon could also lead to higher food costs.

The RBI had left rates untouched after the Iran war broke out in February while evaluating swings in oil prices. India imports most of its energy, and crude was trading around $100 a barrel. About half of the country’s usual crude supplies pass through the Strait of Hormuz, effectively closed since the Middle East war started.

Efforts to draw dollar inflows included a diaspora deposit scheme that attracted around $127 billion. These measures limited the rupee’s decline, but foreign investors’ continued sales of Indian equities and high oil prices have put renewed pressure on the currency.