India's central bank raised its benchmark repo rate by 25 basis points to 5.50% on 7 October, its first increase since February 2023, and changed its policy stance from neutral to "calibrated tightening." The Reserve Bank of India (RBI) cited faster inflation driven by oil prices and a deficient monsoon, and said that rate cuts are off the table in the near term, according to the statement issued after the three-day meeting of its Monetary Policy Committee.
The six-member committee voted unanimously for the rate increase, the RBI said. Two members, Nagesh Kumar and Ram Singh, preferred to keep the stance at neutral. The standing deposit facility rate now stands at 5.25%, while the marginal standing facility rate and the Bank Rate are 5.75%.
The move places India among the Asian economies that have tightened since the conflict in West Asia pushed crude prices higher. Brent crude traded around $102 a barrel on 7 October, Reuters reported.
Inflation up, growth forecast raised
The RBI said consumer price inflation rose to 4.8% in August from 4.5% in July, driven mainly by food and fuel, which Reuters noted was above the central bank's 4% medium-term target for a third consecutive month. Core inflation, which excludes volatile food and fuel prices, also picked up to 4.2%, and the weighted share of items in the consumer basket with inflation above 4% rose to about 37%, according to the statement.
The central bank lifted its inflation forecast for the financial year ending in March 2027 to 5.2% from 5.0%. Its quarterly projections are 4.9% for July-September, 6.0% for October-December and 5.7% for January-March, with core inflation seen at 4.4% for the year.
At the same time, the RBI raised its growth forecast for the year to 7.1% from 6.7%, after the economy expanded 7.8% in April-June, above the central bank's own 7% projection, Reuters reported. Governor Sanjay Malhotra said that "inflation and its outlook are not benign as they were last year." At a press conference after the decision, he described calibrated tightening as "a milder form of tightening," one that is "more data dependent than pre-determined," Reuters reported.
Rupee near its record low, liquidity tools unchanged
The rupee fell to 96.845 per dollar on 7 October, close to the record low of 96.96 it hit in May, Reuters reported. The RBI has regularly sold dollars in the spot market to slow the decline as high oil prices, rising US Treasury yields and foreign portfolio outflows weigh on the currency. Overseas investors had pulled nearly $26 billion out of Indian stocks in 2026 as of 28 September, Reuters reported.
Malhotra said markets can be irrational in the short term and that, by a number of estimates including the real effective exchange rate, the rupee "may be undervalued." He added that the RBI would ensure an orderly movement in the currency.
The central bank did not announce an increase in the reserve ratio, a step some market participants had expected as a way to drain surplus liquidity, and Malhotra called it the "least preferred" option. So far the RBI has relied on bond sales and longer-term foreign exchange swaps. Schemes to draw dollars and support the rupee brought in close to $144 billion by mid-September, and those dollars, swapped with the central bank, pushed system liquidity to a record 11.16 trillion rupees at the start of that month, Reuters reported, citing central bank data.
Indian equities fell on the decision. The Nifty 50 ended 0.76% lower at 22,603.05 and the Sensex shed 0.59% to 72,638.7, with 14 of 16 major sectors declining, according to Reuters. Real estate dropped 1.8% and autos 1.6%, while state-owned banks rose 1%. Thomas J Priju of Karma Capital said banks could see support to margins because loan rates reset faster than deposit costs.
How other central banks have moved
Central banks in the United States, Japan, Europe, Indonesia, the Philippines and South Korea, among others, have raised borrowing costs since the US-Israeli war on Iran began in late February, Reuters reported on 28 September. The RBI statement itself pointed to the US Federal Reserve's September increase and to tightening by other major central banks. Recent decisions across the region:
- The Bank of Korea raised its base rate to 2.75% in July, its first increase in three and a half years, and to 3% on 27 August, the highest since January 2025. Six of seven board members backed the August move, Yonhap reported.
- Japan: the Bank of Japan lifted its policy rate to 1.25% from 1.0% on 18 September, a 31-year high, after an earlier increase in June. Two of nine board members dissented, AP reported.
- The Bangko Sentral ng Pilipinas raised its key rate to 5% on 27 August, a cumulative 75 basis points since April, as the peso closed at a record low of 61.888 per dollar, according to the Philippine Daily Inquirer.
- Bank Indonesia raised rates by 100 basis points in three moves in May and June to defend the rupiah, then held at 5.75% on 23 September. Governor Destry Damayanti said the earlier increases were "sufficient," Reuters reported.
- In the United States, the Federal Reserve raised its key rate by a quarter point on 16 September to about 3.9%, its first increase since 2023, AP reported, among other moves.
Price pressure is also building elsewhere in the region. Philippine inflation accelerated to 7.2% in September from 6.1% in August, a three-year high, according to the Philippine Statistics Authority, as adverse weather and higher oil prices lifted food, utility and transport costs, the Inquirer reported.
What analysts expect next
Economists differ on how far the RBI will go. Sakshi Gupta, an economist at HDFC Bank, expects another 50 to 75 basis points of increases over the coming months, while Krishna Bhimavarapu of State Street Investment Management has a base case of 100 basis points of cumulative tightening over the cycle. As of 28 September, India's one-year overnight index swap priced in 90 basis points of increases over the next 12 months, Reuters reported.
The RBI will publish the minutes of the meeting on 21 October, and its next policy meeting is scheduled for 2-4 December.
Several other central banks decide on policy within weeks. The Bangko Sentral ng Pilipinas meets on 22 October, according to the Inquirer, and Standard Chartered economists Jonathan Koh and Edward Lee now expect a 25 basis point increase to 5.25%, reversing an earlier call for a hold. The Bank of Japan meets on 29-30 October, when it may signal that underlying inflation has roughly reached its 2% target, three sources told Reuters, reinforcing market expectations of a December increase. The Fed also meets in late October, and AP reported on 16 September that most economists expected rates to be left unchanged at that meeting.