India hikes interest rates for first time in over three years as Iran war fuels inflation

India's central bank, the Reserve Bank of India (RBI), has raised interest rates for the first time in over three years due to inflation fueled by the Iran war. The RBI increased its benchmark repo rate by a quarter percentage point to 5.50%, with all six members of its monetary policy committee approving the move. This brings India in line with several other central banks that have tightened policy to control inflation or stabilize their currencies.

The RBI had maintained rates on hold since the war began in February, assessing the impact of changing oil prices on the world's fastest-growing major economy. Strong economic growth in the previous quarter allowed policymakers to focus on rising prices, as India relies heavily on imports for energy and faces a poor monsoon that could drive up food costs.

In August, consumer price inflation reached 4.82%, surpassing the central bank's medium-term target of 4% for the third consecutive month. The RBI is also grappling with a weakening rupee, which has reached near all-time lows in recent days. To bolster the currency, the bank has introduced measures to attract US dollars, including a deposit scheme for Indians living abroad that has attracted about $127 billion.

However, the rupee remains under pressure as overseas investors continue selling Indian shares and oil prices hover near $100 per barrel. As the world's third-largest oil importer, India typically imports around half of its crude through the Strait of Hormuz, a route largely closed since the conflict began. This positions India among economies most vulnerable to a global energy shock, with higher crude and fertilizer costs driving up its import bill.