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

Mumbai, October 7, 2026

Summary

► RBI changes stance to calibrated tightening from neutral
► RBI lifts inflation forecast to 5.2% from 5% for current financial year
► Raises GDP growth forecast to 7.1% from 6.7%
► Governor says duration and extent of rate hike cycle contingent on growth, inflation developments and outlook

India's central bank raised its ​benchmark repo rate by 25 basis points to 5.5% on Wednesday, marking the first rise in nearly four years amid mounting inflation and strong economic growth.

The central ‌bank also signalled more rate hikes by changing its stance from "neutral" to "calibrated tightening", but Governor Sanjay Malhotra said the extent and timing of any more increases would be contingent on actual inflation and growth data.

India has joined major central banks in raising rates as higher oil prices triggered by the Iran war fuel inflation, squeeze purchasing power and weigh on currencies. Weak monsoon rains linked to El Niño have compounded price pressures in Asia's third-largest economy.

The six-member rate ​panel voted unanimously for the rate hike. Nearly 60% of economists in a Reuters poll had expected a 25 bps increase in the repo rate (INREPO=ECI), opens new tab.

"Headline CPI (consumer) inflation is expected to average ​almost 5.8% in the next three quarters," Malhotra said. "In this milieu, recalibrating the policy rate is imperative".

Malhotra added there is some evidence of elevated inflation ⁠expectations and broadening of price pressures and "inflation and its outlook are not benign as they were last year."

At a press conference later, Malhotra said the "calibrated tightening" stance signals a "milder form of ​tightening, (which is) more data dependent than pre-determined."

The RBI now expects inflation at 5.2%, up from its earlier forecast of 5%. Core inflation, which excludes volatile food and fuel prices, is seen at 4.4% from 4.3% ​earlier.

Analysts are divided on how far the central bank will raise rates.

"We expect another 50-75 basis points in rate hikes over the coming months," said Sakshi Gupta, economist at HDFC Bank. "In the event that the West Asia conflict lingers and oil prices remain elevated, the inflation risk could increase further, necessitating a more aggressive tightening cycle," Gupta said.

India's benchmark 10-year bond yield was slightly higher at 7.2269%, while the rupee currency hovered around its previous close at 96.43 ​against the U.S. dollar. It continues to trade near record lows.

HIGHER INFLATION, RESILIENT GROWTH

Consumer inflation accelerated in August to 4.82% from a ​year earlier, above the Reserve Bank of India's 4% medium-term target for a third consecutive month. Higher prices of fuel and food are now rippling through the economy, with nearly half of the consumer basket seeing inflation ‌above 4%.

The ⁠central bank will consider headline inflation but also core inflation and the spread of price pressures to judge the need for further tightening, Malhotra said in a press conference after the policy decision.

At the same time, economic growth remains strong, giving the central bank greater leeway to raise the cost of borrowing for consumers and businesses.

The central bank expects GDP to expand 7.1% in the current financial year, 40 bps higher than its earlier projections.

GDP growth for the April-June quarter stood at 7.8%, well above the central bank's forecast of 7%.

Malhotra said there is limited evidence of demand side pressures in ​inflation so far but risks exist "in view of ​strong growth in monetary and credit aggregates."

India's ⁠bank credit growth has soared in the past few months and grew by 18.8% in October, reflecting strong demand.

MANAGING LIQUIDITY

Contrary to market expectations, the central bank refrained from announcing additional measures such as a hike in the reserve ratio to drain surplus liquidity from the banking system.

"The Reserve Bank ​will use an appropriate mix of liquidity management tools," Malhotra said, later adding that a reserve ratio hike would be the "least preferred" option.

So far, ​the RBI has used bond ⁠sales and longer term FX swaps to drain liquidity.

Schemes to draw dollars and support the rupee drew close to $144 billion as of mid-September, according to central bank data. These dollars, swapped with the central bank, led to a flood of liquidity which peaked at a record 11.16 trillion rupees at the beginning of September.

Commenting on the persistent rupee weakness despite large inflows via these schemes, Malhotra said markets can ⁠be "irrational" in the ​short term, adding the rupee "might be undervalued".

“The RBI has taken a sensible first step with a 25-bps hike, our ​base case remains for 100 bps of cumulative tightening over this cycle," said Krishna Bhimavarapu, Asia pacific economist at State Street Investment Management in Bengaluru.

"The ultimate magnitude will depend on how the global energy shock, food inflation broader inflation dynamics and ​the global tightening cycle evolve in the coming quarters," he said.

[Thomson Reuters]