India raises interest rates for first time since 2023 amid inflation pressure

India’s central bank has raised interest rates for the first time since 2023, lifting its benchmark repo rate by 25 basis points to 5.50% as higher oil prices, food supply risks and El Niño add to inflationary pressure.

The six-member Monetary Policy Committee of the Reserve Bank of India (RBI) voted unanimously on Wednesday (October 7) to increase the policy rate from 5.25%, marking its first rise in nearly four years. The rate is now at its highest level in about a year.

The RBI also shifted its monetary policy stance from “neutral” to “calibrated tightening”, signalling that further increases remain possible depending on inflation and economic growth.

The move puts India alongside other major central banks that have been tightening monetary policy as elevated energy prices and geopolitical tensions fuel inflationary pressure worldwide.

Oil and food prices increase pressure

Sanjay Malhotra, Governor of the Reserve Bank of India, said the economy remained strong and growth momentum was broad-based, but the inflation outlook had deteriorated since the previous policy meeting.

“It is clear that inflation and its outlook are not benign as they were last year,” Malhotra said.

India’s annual consumer inflation accelerated to 4.82% in August, from 4.45% in July, remaining above the RBI’s medium-term target of 4% for a third consecutive month.

The RBI now expects inflation to average 5.2% in the current financial year, up from its previous forecast of 5%, while core inflation is projected at 4.4%.

Higher crude oil prices linked to the conflict involving Iran have become a particular concern for India because of its heavy dependence on imported energy. At the same time, weak monsoon conditions associated with El Niño are increasing the risk of higher agricultural and food prices.

Malhotra said the scale and timing of any further rate increases would depend on actual inflation and growth developments.

A Reuters poll before the decision showed that most economists had expected the 25-basis-point increase, with another rise also anticipated later in the year. HSBC had forecast another quarter-point increase in December, while Goldman Sachs has projected a broader tightening cycle extending into 2027.

El Niño adds to food inflation risk

India also faces growing risks from adverse weather.

Weak rainfall during the monsoon season has raised concerns over agricultural output and food supplies, adding to inflation pressures already created by high energy prices.

Food inflation is particularly important for Indian households because changes in vegetable, grain and other staple prices can quickly feed through into overall consumer inflation.

The combination of elevated oil prices and weather-related food risks has therefore reduced the RBI’s room to ease monetary policy in the near term.

India still among fastest-growing major economies

Despite the inflation risks, economic growth remains relatively strong.

The RBI raised its growth forecast for the current financial year to 7.1%, from 6.7% previously, after the economy expanded 7.8% in the April-June quarter.

The World Bank also expects India’s economy to grow 7.1% in the financial year ending March 2027, supported by robust domestic demand and strong exports, although it warned of risks from elevated global oil prices and El Niño.

The World Bank said India remained one of the fastest-growing major economies, although external risks and higher energy costs could weigh on momentum in the coming quarters.

For the RBI, strong growth provides greater scope to raise borrowing costs to contain inflation without immediately undermining economic activity.

The central bank’s shift towards calibrated tightening nevertheless signals that India has entered a new phase of monetary policy, with future decisions increasingly dependent on whether energy and food-price pressures persist.

Source: Reuters