India Raises Interest Rates for First Time in More Than Three Years

India’s central bank has raised its key lending rate for the first time since 2023, citing accelerating inflation, higher global energy prices and strong growth momentum for the world’s fastest-growing large economy.

Reserve Bank of India governor Sanjay Malhotra said the central bank’s six-member monetary policy committee voted unanimously to raise rates by 0.25 percentage points to 5.5 per cent. It also decided to shift its stance from “neutral” to “calibrated tightening” by a 4-2 vote.

While the central bank expects India’s economy to “remain resilient”, Malhotra said, the inflation outlook was “not benign”. August’s inflation figure came in at 4.8 per cent on a year earlier, above the RBI’s 4 per cent target, and is expected to rise further.

“Driven by escalating energy costs and rising food prices, global inflation is projected to increase sharply, prompting monetary policy tightening by major central banks across the world,” said Malhotra, who took over the helm of the central bank in December 2024.

“Rate cuts are off the table in the near term,” he added.

Economists at Goldman Sachs last week forecast four more rate rises totalling 1 percentage point by the end of the first half of 2027.

The RBI’s move was widely expected and came as global central banks are increasing rates and government bonds have come under pressure. The US Federal Reserve last month raised its rates for the first time in three years, by a quarter point to 4 per cent.

Higher energy costs as a result of the US-Israel war on Iran have also put pressure on the rupee, which is already one of Asia’s worst-performing currencies and weakened 14 per cent in the year to May against the US dollar. India relies on imports for more than 90 per cent of its crude oil.

The central bank has raised $143.6bn through temporary schemes to attract dollars back to the country from the Indian diaspora, which helped infuse liquidity into the banking system and boosted the RBI’s foreign currency reserves.

If the disparity between US and Indian rates goes “too far . . . then you might see pressure on the exchange rate in other areas”, said Paul Gruenwald, global chief economist at S&P Ratings.

India’s economy has managed to defy initial expectations of a severe shock, expanding 7.8 per cent in the quarter to June, as the government shielded consumers from soaring crude prices. 

Malhotra had hailed a “Goldilocks period” for the economy late last year, with soaring growth and low inflation.

BMI, a Fitch Ratings company, warned that the “growth mix is deteriorating”, with consumption cooling and frontloaded exports beginning to unwind.

A weaker than usual monsoon season, on which India’s rural economy relies, and a strong El Niño weather pattern that is expected to reach the peak of its intensity in the coming months, could further drag on economic growth, analysts said.