India's central bank raises rates for first time since 2023, repo rate to 5.50%

The Reserve Bank of India raised its benchmark repo rate — the rate at which the central bank lends to commercial banks — by 25 basis points to 5.50% on 7 October, CNBC reported. It was the first increase since 2023 and took the rate to a one-year high, in line with the expectations of economists polled by Reuters, according to CNBC. RBI governor Sanjay Malhotra said the monetary policy committee decided to change the policy stance "to calibrated tightening."

Malhotra said India's economic growth has been strong despite global challenges, but added that "inflation and its outlook are not benign, as they were last year." CNBC reported that retail inflation has risen for 10 straight months, reaching 4.8% in August, above the RBI's medium-term target of 4%. The central bank expects core inflation of 4.4% and headline inflation of 5.2% for the financial year ending March 2027, according to CNBC.

The RBI raised its economic growth estimate for the financial year ending March 2027 by 40 basis points to 7.1%, citing resilient economic activity, CNBC reported. The central bank said protracted geopolitical tensions, trade frictions, tightening of financial conditions and elevated international commodity prices would likely weigh on growth, according to CNBC.

Malhotra said "given the current conditions, rate cuts are off the table in the near term, and policy action ahead can only be a rate hike or a pause." CNBC reported that HSBC and Goldman Sachs expect the RBI to raise interest rates again in December. HSBC said in a report on 5 October that markets need to see a "credible" hike showing the bank's ability to raise rates again, and that a hike perceived as dovish while inflation rises would hurt India's appeal among global investors.

The yield on the benchmark 10-year government bond rose 5 basis points to 7.243% and the Nifty 50 stock index fell 0.7% after the decision, according to CNBC. India's economy expanded by 7.8% in the June quarter, better than expected, even as growth cooled in the U.S., China and Japan, CNBC reported. The World Bank said in a report on 6 October that it expects India's growth to slow to 7.1% in the financial year ending March 2027, from 7.8% the previous year. The bank said growth held up "better than expected despite trade and geopolitical uncertainties" but will moderate over the next few quarters, CNBC reported.

Several other major central banks have also raised interest rates, CNBC reported. The U.S. Federal Reserve raised rates in September for the first time in more than three years and indicated another hike could follow. The Bank of Japan raised rates to a 31-year high, and the South Korean and European central banks have also raised rates in the last two months, according to CNBC.