India's first bank rate hike since 2023 signals growing inflation concerns

The Reserve Bank of India raised its policy rate on Wednesday, marking the first increase since February 2023 and signalling renewed inflation worries. Governor Sanjay Malhotra said the decision “reflected challenging geopolitical developments” while noting that the Indian economy “remained strong.” He added that rate cuts are “off the array for now” and that the central bank’s bias is to either raise rates further or hold them steady to contain inflation. The RBI now forecasts Consumer Price Index (CPI) inflation at 5.2% for 2026‑27, up from the earlier 5% estimate, citing supply disruptions, a weak monsoon and heightened volatility in global oil prices. Crude oil remains above $100 (£75.33) per barrel, forcing India to pay more as the rupee hovers near its all‑time low against the dollar. The country imports roughly 90% of its crude oil and about half of its natural gas requirements. The last rate increase occurred in February 2023, ending the post‑pandemic tightening cycle. For most of 2025 the RBI reduced rates to support growth, then kept policy unchanged from December 2025 until today’s move. Malhotra observed that the hike aligns with economists’ expectations, arguing that rising inflation justifies tighter policy, especially since the economy has shown enough resilience to absorb the impact without jeopardising growth. He also noted the global context, pointing out that the US Federal Reserve has aggressively lifted rates since 2022, pushing Treasury yields higher and a strong dollar prompting capital outflows from emerging markets such as India in search of better returns. On the same day the RBI upgraded its growth outlook after the economy outperformed estimates in the first quarter. Gross domestic product (GDP) growth for the current fiscal year is now projected at 7.1%, up 40 basis points from the previous forecast. The governor said the RBI will “strive for terms and fiscal stableness” as both are essential for sustainable long‑term expansion. He added that the central bank will employ a mix of liquidity absorption tools to keep surplus funds in check while continuing to curb excessive rupee volatility. Anuj Puri, president of ANAROCK Group, warned that the rate increase could affect consumer sentiment and discretionary spending. “The festive play is simply a cardinal play for lodging demand, and an summation in borrowing costs volition impact purchaser sentiment,” he said.