Indian central bank hikes rates for first time since 2023

India's central bank, the Reserve Bank of India (RBI), has raised interest rates for the first time since 2023, following the Middle East conflict which has increased inflation in Asia's third-largest economy and weakened the rupee. The benchmark repurchase rate was increased by 25 basis points to 5.50 percent after a unanimous vote by a six-member panel.

This move comes as several central banks worldwide have also raised rates to curb price rises and bolster currencies. Since the outbreak of the Iran war in February, the RBI had remained silent, awaiting an assessment of the impact of volatile oil prices on the fastest-growing major economy. However, resilient GDP growth in the last quarter allowed the RBI to focus on higher costs in a country that imports most of its energy and has been affected by a weak monsoon, which could lead to a spike in food prices.

Retail inflation rose to 4.8 percent in August, the third consecutive month it exceeded the RBI's medium-term target of 4 percent. RBI Governor Sanjay Malhotra acknowledged that inflation and its outlook are no longer benign, stating that there is evidence of generalization of inflation. The Monetary Policy Committee (MPC) also decided to change the stance to calibrated tightening, signaling that rate cuts are off the table in the near term and that policy action can only be a rate hike or a pause, depending on evolving conditions and the outlook.

The hike marked the first since February 2023, and analysts predict another 50 basis points increase this cycle. The global rise in interest rates has limited the RBI's flexibility, and the central bank faces pressure to maintain the Indian rupee's stability. To protect the currency, the RBI has introduced various measures to attract dollar inflows, such as a deposit scheme for the Indian diaspora.