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The Reserve Bank of India raised its benchmark repo rate by 25 basis points to 5.50% on Wednesday, delivering its first interest rate hike since February 2023 as policymakers respond to rising inflation risks and geopolitical uncertainty.
The Monetary Policy Committee unanimously approved the increase from 5.25%, broadly matching market expectations. The MPC also voted 4-2 to change its policy stance from “neutral” to “calibrated tightening,” signaling that further RBI rate hikes could follow.
RBI Governor Sanjay Malhotra said future policy decisions would depend on incoming inflation and economic growth data. The central bank is facing a more challenging global environment, with geopolitical tensions and elevated energy prices posing risks for India, a major energy importer.
Capital Economics Senior APAC Economist Abhijit Surya said the RBI’s hawkish guidance reinforced expectations for additional tightening. The firm forecasts another 25-basis-point hike in December and February, which would lift the repo rate to 6%, compared with the 5.75% peak expected by consensus.
The RBI expects headline consumer price inflation to average 5.8% over the next three quarters, including the current quarter. Core inflation, excluding food and fuel, is projected at 4.4% for the current financial year.
India’s CPI inflation accelerated to 4.82% in August from 4.45% in July, while food inflation climbed to 5.95% from 5.52%.
Despite higher price pressures, India's economy remains resilient. The RBI raised its growth forecast for the current financial year to 7.1%, up 40 basis points from its previous projection. GDP expanded 7.8% in the April-June quarter, exceeding the central bank’s 7% estimate.
Following the RBI decision, the Indian rupee strengthened modestly, with USD/INR falling 0.2% to 96.59. The Nifty 50 was down 0.4%.
The rate increase marks a significant policy reversal after the RBI's 125-basis-point easing cycle that began in February 2025. The central bank had kept the repo rate unchanged at 5.25% at its August meeting.
