India raises policy rate by 25 bps in first hike in nearly four years

The Reserve Bank of India increased its benchmark repo rate by 25 basis points to 5.5% on Wednesday, marking the first hike in nearly four years, according to Reuters. The decision comes as inflation continues to rise and strong economic growth fuels the central bank's move. Higher oil prices resulting from the Iran conflict have contributed to inflation, eroding purchasing power and weakening currencies.

Weak monsoon rains, linked to El Niño, have further exacerbated price pressures in India, the world's third-largest economy.

The six-member rate panel voted unanimously in favor of the rate hike, with Governor Sanjay Malhotra stating in his policy address that the outlook for inflation is no longer benign. Nearly 60% of economists in a Reuters poll anticipated a 25 bps increase in the repo rate. In August, consumer inflation surged to 4.82%, surpassing the Reserve Bank of India's 4% medium-term target for the third consecutive month.

The surge in prices of fuel and food is now affecting the economy, with nearly half of the consumer basket experiencing inflation rates above 4%. Despite the rising inflation, the Indian economy remains robust, with GDP growth for the April-June quarter at 7.8%, significantly higher than the central bank's forecast of 7%. This strong economic growth provides the central bank with more flexibility to raise borrowing costs for consumers and businesses.