Indian central bank hikes rates for first time since 2023

The Reserve Bank of India (RBI) raised interest rates by 25 basis points to 5.50% on Wednesday for the first time since 2023, in response to inflationary pressures in Asia's third-largest economy and the weakening of the rupee. The move came after the Middle East conflict stoked inflation in Asia and battered the weakened currency.

RBI Governor Sanjay Malhotra stated that the inflationary trend was no longer benign, and the central bank would now pursue calibrated tightening. The monetary policy committee decided that rate cuts were off the table in the near term, and only rate hikes or pauses would be considered as policy actions. Analysts forecast that the RBI may raise rates again in the near future.

The global trend of rising interest rates has limited the RBI's flexibility, and the Indian rupee's near-record lows have added to the central bank's calculations. The pressure on the rupee has led the RBI to implement various measures to attract dollar inflows, including a deposit scheme for the Indian diaspora, which attracted around $127 billion.

However, the currency continues to face challenges as foreign investors sell Indian equities, and crude oil prices hover around $100 per barrel. India, the world's third-largest crude buyer, imports about half of its crude through the Strait of Hormuz, which has been closed since the beginning of the conflict. This vulnerability makes India among the most susceptible economies to a global energy shock, as higher crude and fertiliser prices increase the import bill.