India’s central bank raises rates for first time in three years

The Reserve Bank of India (RBI) raised its benchmark interest rate by 25 basis points to 5.50 percent on Wednesday, marking the first increase in over three years. This move aims to curb inflation and bolster the weakened Indian rupee. The increase, approved unanimously by the six-member monetary policy committee, aligns India with central banks worldwide responding to inflation and currency pressures.

The rate, known as the repurchase rate, had remained unchanged since late 2023 as policymakers evaluated the impact of volatile energy prices on India's third-largest economy. India's GDP grew faster than expected in the previous quarter, suggesting growth resilience that could justify the rate hike. Inflation accelerated to 4.82 percent in August, surpassing the RBI's medium-term target of 4 percent for three consecutive months.

Price pressures extended beyond energy and food, indicating a broader inflation trend the central bank must address. The rupee weakened to near-record lows due to foreign investors withdrawing from Indian equities and crude oil prices nearing $100 a barrel. The RBI has implemented several measures to support the currency, including a deposit scheme for overseas Indians that attracted approximately $127 billion in inflows.

As the world's third-largest oil importer, India is particularly vulnerable to energy price shocks, with about half its crude sourced through the Strait of Hormuz, which has been blocked since February due to the Middle East conflict. Higher crude and fertilizer prices are straining India's already significant import bill.