India’s central bank hikes rates for first time in more than 3 years

India's central bank, the Reserve Bank of India (RBI), raised interest rates for the first time in over three years on Wednesday. The decision came as the Middle East conflict escalates inflation in Asia's third-largest economy and weakens the already struggling rupee. The RBI increased the benchmark repurchase rate by 25 basis points to 5.50%, after a unanimous vote by a six-member panel.

This move follows several central banks worldwide raising rates to curb price rises or strengthen their currencies. Since the beginning of the Iran war in February, the RBI had remained inactive, waiting to evaluate the impact of volatile oil prices on India's fast-growing economy. However, the recent robust GDP growth has allowed the RBI to focus on higher costs, with a significant portion of India's energy imports.

Retail inflation reached 4.82% in August, marking the third consecutive month that inflation exceeded the RBI's medium-term target of 4%. The data suggests that inflationary pressures have now spread beyond food and transport. The Indian rupee has been at near-record lows over the past week, adding to the central bank's calculations.

To counter the fall, the RBI has introduced various measures, such as a deposit scheme for the Indian diaspora, which attracted nearly $127 billion. While these steps helped stabilize the rupee, the currency continues to face challenges as foreign investors continue to sell Indian equities, and crude oil hovers around $100 a barrel.

As the world's third-largest oil importer, India is particularly vulnerable to global energy shocks, with half of its crude sourced through the Strait of Hormuz, which is effectively closed since the start of the Middle East war. Analysts warn that higher crude and fertilizer prices could drive up India's import bill.