The Reserve Bank of India's monetary policy committee increased the repo rate by 25 basis points to a one-year high of 5.50%, marking its first rate hike in three years. The decision, which was in line with a Reuters poll of economists, reflects growing concern over inflation that has been rising for ten consecutive months.
Retail inflation touched 4.8% in August, above the RBI's medium-term target of 4%. Governor Sanjay Malhotra described the inflation outlook as "not benign" and announced a change in the policy stance to "calibrated tightening." He added that rate cuts are "off the table in the near term" and that future action can only be a hike or a pause.
HSBC and Goldman Sachs expect the RBI to raise rates again in December. HSBC cautioned that if the hike is perceived as "dovish" while inflation is rising and likely to persist, it could hurt India's appeal among global investors.
India remains the world's fastest-growing major economy but faces acute risks from the Iran war, which has disrupted supply routes. The country meets nearly 85% of its fuel needs through imports, and the Strait of Hormuz was a key route before the conflict. Additionally, the World Bank noted that India experienced its fourth-driest June-to-August period since 1960 due to El Nino, which could drive up food prices.
The World Bank projects India's economic growth will slow to 7.1% in the financial year ending March 2027, down from 7.8% the previous year, though growth held up "better than expected" despite trade and geopolitical uncertainties. India reported a better-than-expected economic expansion of 7.8% in the June quarter, even as growth cooled in many major economies.