India's Central Bank Hikes Repo Rate By 25 Bps

India's central bank, the Reserve Bank of India (RBI), raised interest rates for the first time in over three years on Wednesday, responding to rising inflation and a weakened rupee caused by the ongoing conflict in the Middle East. The benchmark repurchase rate, which is the rate at which the RBI lends to commercial banks, was increased by 25 basis points to 5.50%.

This move brought the RBI's interest rate policy in line with several other central banks globally, which have also raised rates to combat inflation and strengthen currencies.

Following the Iran war in February, the RBI had maintained its stance, monitoring the impact of volatile oil prices on India's fastest-growing major economy. However, the resilient GDP growth in the previous quarter enabled the central bank to concentrate on the rising costs and potential food price spikes due to a weak monsoon.

Inflation, measured by retail inflation, reached 4.82% in August, surpassing the RBI's medium-term target of 4% for the third consecutive month. This surge in inflation was observed across various sectors beyond food and transport costs. The Indian rupee, already at near-record lows, faced additional pressure, prompting the RBI to take several actions to attract dollar inflows, including a deposit scheme for the Indian diaspora, which garnered approximately US$127 billion.

Despite these efforts, the rupee continues to struggle, with foreign investors persisting in selling Indian equities, and crude prices hovering around US$100 per barrel. India, as the world's third-largest oil consumer, imports roughly half of its crude through the Strait of Hormuz, which has been largely blocked since the onset of the Middle East war.

This vulnerability to global energy shocks is heightened by the escalating demand for oil and fertilizers, which, in turn, increase the nation's import expenditure.