RBI raises rates amid rising inflation and global risks outlook

Covered by Aol, CNBC and 7 more since

  • Reserve Bank of India
  • India
  • Western Asia
  • New Delhi
  • Federal Reserve
  • Mumbai
  • State Bank of India
A stately stone central bank building in Mumbai at early morning, warm light on its columns, with a few distant pedestrians under a hazy sky.

What happened

The Reserve Bank of India raised its benchmark repo rate by 25 basis points to 5.5% on Wednesday, its first increase since 2023. The rate panel acted because inflation has climbed above its 4% target, pushed up by Iran war oil prices and weak monsoon rains. It also signaled that more increases could follow.

Summary

Borrowing in India just got a little more expensive. On Wednesday the Reserve Bank of India's six-member rate panel voted unanimously to raise the benchmark repo rate from 5.25% to 5.5%. That is a quarter-point move, the bank's first increase in nearly four years. The bank also changed its stance from "neutral" to "calibrated tightening," which economists read as a sign that rates could keep rising. Governor Sanjay Malhotra said the size and timing of any further increases would depend on how inflation and growth actually turn out. Most economists polled ahead of the meeting had expected the hike. [1] [2] [5] [6] [7]

The main driver is prices. Consumer inflation reached 4.82% in August and has stayed above the bank's 4% target for three months running. Higher oil prices tied to the Iran war are a big part of that. India imports nearly 85% of its fuel, and the Strait of Hormuz was a key supply route before the war. Weak monsoon rains linked to El Niño are pushing food costs higher, and the rupee has fallen more than 7% against the dollar this year. Malhotra said inflation and its outlook "are not benign as they were last year." The bank now expects 5.2% inflation for the year and 7.1% economic growth. [1] [2] [5] [9]

Most forecasters expect more increases. HDFC Bank sees another 50 to 75 basis points, and State Street Investment Management's base case is 100 basis points over the whole cycle. ING expects the rate to reach 6% within six months. Capital Economics expects quarter-point hikes in both December and February, and HSBC and Goldman Sachs also look for a December move. There was one split: The Wall Street Journal reported that the stance change passed 4-2, even though the rate hike itself was unanimous. Stocks slipped after the decision, with the Nifty 50 down about 0.3% to 0.4%. [1] [2] [4] [5] [6] [8] [9]

Summary written by Vox Populi News from the 9 sources below. See all sources

Key questions

Why did India's central bank raise interest rates?

Inflation has risen above the bank's 4% target, driven by oil prices linked to the Iran war, weak monsoon rains that are raising food costs and a weaker rupee. Governor Sanjay Malhotra said the inflation outlook had worsened since the bank's last meeting. [1] [2] [5] [9]

Will the RBI raise rates again?

The bank's new "calibrated tightening" stance points to further increases, though Malhotra said the timing depends on the data. Economists at HDFC Bank, ING, Capital Economics, HSBC and Goldman Sachs all expect more hikes, several of them as soon as December. [1] [2] [6] [8] [9]

What is India's repo rate now?

The repo rate is now 5.5%, up from 5.25%. The bank says the change raises the cost of borrowing for consumers and businesses. [1] [7]

Sources 9

  1. 1Aol

    India joins global rate-tightening wave with first hike in nearly 4 years

    By Jaspreet Kalra and Abinaya V MUMBAI, Oct 7 (Reuters) - The Indian central bank raised its benchmark repo rate by 25 basis points to 5.5% on Wednesday, marking the first rise in nearly four years…

    Read on Aol (opens in a new tab)
  2. 2CNBC

    India's central bank hikes rates for the first time since 2023 as inflation creeps up

    * India's central bank on Wednesday raised its key policy rates by 25 basis points to 5.5%. * A Reuters poll of economists had forecast interest rates would be hiked by 25 basis points.

    Priyanka Salve

    Read on CNBC (opens in a new tab)
  3. 3The Wall Street Journal

    India's Central Bank Raises Rates For First Time Since 2023

    The committee voted to change its stance to "calibrated tightening" from "neutral" India's central bank raised interest rates for the first time in more than three years as the Middle East conflict…

    Kimberley Kao

    Read on The Wall Street Journal (opens in a new tab)
  4. 4Bloomberg Business

    India Set for Back-to-Back Rate Hikes as Inflation Risks Mount

    India's central bank will likely raise interest rates at successive meetings into next year as broadening price pressures push it deeper into a global tightening cycle.

    Ruchi Bhatia, Anup Roy

    Read on Bloomberg Business (opens in a new tab)
  5. 5Morningstar

    India's Central Bank Raises Rates For First Time Since 2023

    India's central bank raised interest rates for the first time in more than three years as the Middle East conflict keeps energy prices high, hurting the rupee and fueling inflation fears.

    Read on Morningstar (opens in a new tab)
  6. 6Finimize

    RBI's First Rate Hike In Four Years Comes With A Warning

    India's central bank raised its repo rate 25 basis points to 5.5% and shifted to "calibrated tightening," hinting the hiking cycle could run further.

    Finimize Newsroom

    Read on Finimize (opens in a new tab)
  7. 7RTTNews

    India Raises Interest Rates By 25 Bps; Shifts Stance To Calibrated Tightening

    The Reserve Bank of India raised its benchmark interest rates by 25 basis points and changed its monetary policy stance to calibrated tightening.

    Renju Jaya

    Read on RTTNews (opens in a new tab)
  8. 8Hellenic Shipping News

    A tighter RBI, but not a hawkish one

    RBI hikes policy rate as expected The MPC unanimously voted to raise the policy repo rate by 25bp to 5.50%, marking its first rate hike in four years.

    Read on Hellenic Shipping News (opens in a new tab)
  9. 9EconoTimes

    Indian Stocks Fall as RBI Hikes Rates to 5.50%

    Indian Stocks Fall as RBI Hikes Rates to 5.50%. Source: Pinakpani, CC BY-SA 4.0, via Wikimedia Commons Indian stocks declined on Wednesday after the Reserve Bank of India raised interest rates for…

    Riza Dagoc

    Read on EconoTimes (opens in a new tab)