India’s central bank lifts rates for first time in nearly four years
Published Wed, Oct 7, 2026 · 01:55 PM
INDIA’S central bank raised interest rates for the first time in nearly four years and signalled further hikes may be on the table as rising inflation and a weakening currency drive a policy pivot.
The Reserve Bank of India’s six-member monetary policy committee voted unanimously to raise the benchmark repurchase rate by 25 basis points to 5.5 per cent, the first hike since Sanjay Malhotra took over as governor in December 2024. Most economists in a Bloomberg survey predicted the move.
The committee voted four-to-two to change its policy stance to calibrated tightening from neutral.
The MPC “observed, in light of the available data, that it is clear that inflation and its outlook are not benign as they were last year,” Malhotra said in a televised statement from the RBI headquarters in Mumbai. Against that backdrop, he added that “recalibrating the policy rate” had become “an imperative.”
The RBI’s revised stance “underscored that given the current conditions, rate cuts are off the table in the near term, and policy action can only be a hike or a pause, depending on the evolving conditions,” Malhotra added.
The benchmark 10-year bond yield jumped to the highest level since December 2023 after the decision. The rupee was largely steady at 96.40 to a dollar.
Central banks across Asia, from South Korea to the Philippines, have tightened policy as the Middle East conflict pushes oil prices back above US$100 a barrel, adding to inflationary pressures. The Federal Reserve has also raised rates, narrowing the room for emerging-market policymakers to look past higher energy costs.
“The rising interest rate backdrop globally has reduced RBI’s degrees of freedom,” said Garima Kapoor, an economist with Elara Securities. “We see the likelihood of another 50 basis point hike this cycle.”
Kotak Mahindra Bank’s Upasna Bhardwaj also expects another 25-50 basis points of hikes going forward.
Expectations for a hike gathered pace after consumer inflation climbed to 4.82 per cent in August, edging closer to the upper end of the RBI’s 2 to 6 per cent tolerance band. The weakest monsoon in more than a decade is adding to the risk of higher food prices, while the rupee’s slide is making imported goods and commodities more expensive.
“Near-term outlook on inflation points towards continued pressures from supply side,” Malhotra said. “Early signs of inflation becoming generalised are also evident from the increase in core inflation and higher inflation across a larger segment of the CPI basket.”
The RBI on Wednesday lifted its projection for inflation to 5.2 per cent for the year-ending March 2027, from previous expectation of 5 per cent.
Strong growth gives the RBI room to tighten. The economy expanded 7.8 per cent in the June quarter, beating the central bank’s forecast as domestic demand remained resilient, allowing policymakers to focus more squarely on inflation and currency risks. The RBI now expects fiscal year growth of 7.1 per cent, from 6.7 per cent previously.
Foreign-exchange reserves posted a record weekly decline last week as the RBI intervened to prop up the currency. At the same time, a surge in dollar inflows has boosted domestic liquidity, adding to the inflation challenge.
Malhotra said the RBI remains committed to allowing the rupee to adjust in line with India’s economic fundamentals while acting to contain excessive volatility. BLOOMBERG
