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On October 7, the Reserve Bank of India announced its decision to raise the repurchase rate, which serves as the benchmark interest rate, by 25 basis points to 5.50%. This marks the first rate hike by India's central bank since February 2023. RBI Governor Sanjay Malhotra stated that inflationary pressures are currently intensifying, and going forward, the central bank will continue to raise rates or keep them unchanged depending on changes in economic conditions.
Far East Commentary
The RBI's rate hike this time is the result of both inflationary pressures and growth resilience working together. On the inflation front, India's CPI rose from 4.83% in August to 5.54% in September, hitting a new high for the year, and remained above the central bank's 4% medium-term target for four consecutive months while approaching the 6% upper threshold. Among the components, food inflation surged from 5.97% to 7.74%, and with food accounting for over 45% of the CPI basket, it became the primary force driving inflation higher. At the same time, imported inflationary pressures stemming from the rupee's depreciation continued to accumulate. In 2025, the United States imposed a 50% tariff on Indian goods, causing India's exports to the US to plummet and its trade deficit to widen. Foreign capital withdrew over $17 billion from Indian stock markets, and the rupee depreciated by more than 6% against the US dollar, at one point falling below the 91 mark. In the first nine months of 2026, net foreign capital outflows reached $32.7 billion, and the rupee exchange rate fell from the 90-91 range at the beginning of the year to the 95-97 range. The deadlock in US-India trade negotiations weakened export prospects, and capital outflows and the trade deficit reinforced each other, driving up the cost of dollar-denominated imported energy and commodities, creating a compounding effect with rising food prices. On the macroeconomic front, relatively solid economic fundamentals provided room for the rate hike: GDP grew 7.7% year-on-year in fiscal year 2025-26, and GDP growth reached 8.2% year-on-year in the second quarter of 2026. Strong domestic demand allowed the central bank to tighten monetary policy to anchor inflation expectations without excessively impacting growth. In the short term, the market expects policy may tighten further within the year.
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