Indian central bank hikes rates for first time since 2023

India's central bank, the Reserve Bank of India (RBI), raised interest rates for the first time since 2023, amid inflation concerns sparked by the Middle East conflict and a weakened rupee. The bank increased the benchmark repurchase rate by 25 basis points to 5.50%, after unanimous approval by a six-member panel. The move follows several global central banks hiking rates to control inflation and boost currencies.

Despite the Iran war since February, RBI had remained cautious, waiting to evaluate the impact of volatile oil prices on India's fast-growing economy. However, healthy GDP growth last quarter prompted the bank to focus on higher costs, with most of the country's energy imports and a weak monsoon potentially raising food prices. Retail inflation hit 4.8% in August, surpassing the RBI's medium-term goal of 4% for three consecutive months, with inflation spreading beyond food and transport costs.

RBI Governor Sanjay Malhotra acknowledged that inflation concerns are now more serious than last year, stating, "the outlook is not benign." The monetary policy committee decided to adopt a "calibrated tightening" approach, indicating that rate cuts are off the table in the near term. Analysts anticipate further rate hikes, with Garima Kapoor of Elara Capital predicting another 50 basis points increase this cycle.

The rupee's near-record lows have added pressure to the RBI's calculations, with the central bank rolling out measures to attract dollar inflows, including a deposit scheme for the Indian diaspora. Despite these efforts, the currency faces ongoing challenges as foreign investors continue to sell Indian equities and crude oil trades around $100 per barrel.

As India, the world's third-largest oil importer, relies heavily on the Strait of Hormuz for about half its crude, the country is highly vulnerable to global energy shocks, with rising crude and fertilizer prices driving up the import bill.