NEW DELHI, October 07, 2026 (DAILYNWZ) — India’s central bank raised its benchmark interest rate for the first time since 2023, shifting toward tighter monetary policy as inflation accelerates despite resilient economic growth.
The Reserve Bank of India increased the repo rate by 25 basis points to 5.50%, its highest level in a year, in line with economists’ expectations. Governor Sanjay Malhotra said inflation and its outlook were no longer as favorable as they had been last year.
The Monetary Policy Committee also changed its policy stance to “calibrated tightening,” signaling that further rate increases remain possible.
Retail inflation has risen for 10 consecutive months, reaching 4.8% in August, above the RBI’s medium-term target of 4%. The central bank expects core inflation to average 4.4% in the financial year ending March 2027, while headline inflation is projected at 5.2%.
“Given the current conditions, rate cuts are off the table in the near term, and policy action ahead can only be a rate hike or a pause,” Malhotra said.
HSBC and Goldman Sachs expect another rate increase in December. HSBC said the RBI needs to deliver a “credible” tightening cycle that demonstrates its willingness to raise rates again if needed to contain inflation. A hike seen as too dovish while inflation is rising could weaken India’s appeal to global investors, the bank said.
The RBI raised its economic growth forecast by 40 basis points to 7.1%, citing resilient activity, but warned that prolonged geopolitical tensions, trade frictions, tighter financial conditions and elevated international commodity prices could weigh on expansion.
India remains the world’s fastest-growing major economy but is vulnerable to supply disruptions linked to the Iran war because it imports nearly 85% of its fuel needs. The Strait of Hormuz was a key supply route before the conflict.
Weather risks could also add to inflation pressures. India faces the possibility of El Niño, while the World Bank said the country experienced its fourth-driest June-August period since 1960, raising the risk of higher food prices.
The World Bank expects growth to slow to 7.1% in the year ending March 2027 from 7.8% a year earlier. It said economic activity had held up “better than expected despite trade and geopolitical uncertainties,” but was likely to moderate over the coming quarters.
India’s economy expanded 7.8% in the June quarter, outperforming expectations even as major economies including the United States, China and Japan faced weaker growth amid trade disruptions, geopolitical uncertainty and high energy prices.
The RBI’s move comes as several major central banks have also tightened policy in response to inflation and higher energy costs. The U.S. Federal Reserve raised rates last month for the first time in more than three years and signaled another increase could follow, while the Bank of Japan lifted rates to a 31-year high. South Korea’s and Europe’s central banks have also raised rates over the past two months.
Indian markets reacted cautiously. The benchmark 10-year government bond yield rose 5 basis points to 7.243%, while the Nifty 50 stock index fell 0.7%.