Mumbai: India's central bank has raised its policy repo rate by 25 basis points to 5.50 percent, its first rate increase since February 2023, as rising inflation pressures challenge an otherwise strong economic outlook.
The Reserve Bank of India's six member Monetary Policy Committee unanimously approved the rate increase on Wednesday at the end of its three day meeting. The central bank also changed its monetary policy stance from neutral to calibrated tightening, signalling that further rate increases could be considered depending on inflation and economic conditions.
The change in policy stance was approved by four members of the committee, while two members opposed it. The separate votes show that while the rate increase had full support, there was some disagreement over the direction of monetary policy.
RBI Governor Sanjay Malhotra said the timing and extent of any further rate increases would depend on how inflation and economic growth develop. The change in stance does not mean that the central bank has committed itself to a fixed series of rate increases.
The decision comes as consumer inflation has moved above the RBI's medium term target of 4 percent. India's consumer inflation rose to 4.82 percent in August, marking the third consecutive month in which inflation was above the central bank's target.
The RBI has also raised its inflation forecast for the financial year to 5.2 percent. Core inflation is now expected at 4.4 percent, compared with the earlier forecast of 4.3 percent.
Malhotra said the inflation outlook had become less favourable compared with last year. Higher food and energy costs have added to concerns about the future path of inflation.
Higher global oil prices are another concern for India, which relies heavily on imported crude oil. The continuing conflict in West Asia has contributed to uncertainty in energy markets, while an uneven monsoon and El Niño conditions have added risks to food prices.
At the same time, India's economy continues to grow strongly. The economy expanded by 7.8 percent in the April to June quarter, stronger than the RBI's earlier expectation of 7 percent. The central bank has raised its forecast for economic growth in the financial year to 7.1 percent from 6.7 percent.
The combination of strong growth and rising inflation has given the RBI more room to focus on price stability while the economy continues to expand. The central bank continues to see strong underlying momentum in economic activity.
The rate decision could affect borrowing costs for households and businesses. Banks may increase lending rates on some floating rate loans after the RBI's move, which could raise monthly payments or extend repayment periods for some borrowers. The actual impact will depend on the type of loan and how individual banks adjust their rates.
The higher policy rate could also influence deposit rates as banks respond to changing financial conditions. The impact will not necessarily be immediate or identical across all banks and customers.
Financial markets had largely expected a 25 basis point increase before the decision. The bigger policy signal came from the change in the RBI's stance towards calibrated tightening.
The latest decision marks a clear change from the RBI's recent policy direction. The central bank last raised its repo rate in February 2023, when it increased the rate to 6.50 percent. It later held rates steady and subsequently reduced the repo rate to 5.25 percent.
The decision leaves open the possibility of further rate increases, but the RBI has not committed to a fixed path. Future policy action will depend on inflation, economic growth and wider financial conditions.