RBI raises policy rates 25 bps to tame inflation as India hurdles growth barriers

The Reserve Bank of India (RBI) increased its benchmark repo rate by 25 basis points to 5.50% on Wednesday, marking its first rate hike since February 2023. This decision was made in response to a less favorable inflation outlook and heightened geopolitical risks, both of which have complicated the bank's inflation expectations.

The Monetary Policy Committee (MPC) raised the policy rate from 5.25%, a move that aligns with economists' forecasts. Despite the challenging global conditions, the RBI remains optimistic about the Indian economy's resilience. However, the bank acknowledges that the current inflation environment and outlook differ from those observed last year.

The MPC forecasts headline consumer price inflation to average 5.8% over the next three quarters, with core inflation (excluding food and fuel) expected to be 4.4% for the current financial year. These revised projections come as price pressures have intensified, with India's consumer price inflation rising to 4.82% in August, up from 4.45% in July, and food inflation increasing to 5.95% from 5.52%.

The RBI is also contending with a more difficult external backdrop, as geopolitical developments create uncertainty in global economic conditions and energy prices remain a significant risk for India, an import-dependent nation. Meanwhile, the resilient domestic economy provides the central bank with greater flexibility to focus on inflation without being swayed by an immediate growth slowdown.

The Indian rupee experienced a slight strengthening against the US dollar, with the USD/INR pair falling by 0.2% to 96.59 rupees. India's benchmark Nifty 50 index declined by 0.4% following the decision. The rate hike comes after a 125-basis-point easing cycle that began in February 2025. Prior to this increase, the RBI had maintained the repo rate at 5.25% during its August meeting, after keeping it constant at that level at its previous reviews.