Mumbai: The Reserve Bank of India (RBI) raised its key interest rate for the first time in nearly four years as rising inflation risks and a sharp shift in the global rate environment prompted the central bank to reverse its easing cycle.
The Monetary Policy Committee (MPC) increased the key repo rate by 25 basis points to 5.50%, Governor Sanjay Malhotra said on Wednesday. Nine of 10 economists surveyed by Mint had expected a rate hike, while only one called for a pause. This is the first increase since February 2023, when the RBI raised the repo rate – the rate at which commercial banks borrow from the RBI
The six-member rate-setting panel also decided to change the stance to ‘calibrated tightening’ from its ‘neutral’ stance earlier. The governor said that calibrating policy tightening is imperative.
Consequently, the standing deposit facility (SDF) rate was increased to 5.25% from 5% earlier.
Consumer prices
The hike comes as a surge in global commodity prices, spurred by the West Asia war, threatens to fan inflation, which rose to a 22-month high of 4.8% in August, above the central bank’s 4% midpoint target. Consumer prices are also under pressure from a deficient monsoon and imported inflation amid a weakening rupee.
Rising inflationary pressures and a wave of rate hikes by global central banks, including the US Federal Reserve last month, also likely prompted the to raise rates.
In 2025, the central bank cut the repo rate by a total of 125 basis points (bps), with the last reduction of 25 bps in December taking the rate to 5.25%. It had remained on hold so far in 2026. The repo, or repurchase, rate is the rate at which the lends short-term funds to commercial banks, typically against government securities as collateral.
India, a net energy importer, is particularly vulnerable to global energy shocks. Every $1 increase in global crude oil prices costs India about $1.8 billion a year, Neelkanth Mishra, the Group’s executive director for India, said earlier. The impact is not limited to oil, as higher prices could also raise the cost of gas and fertilizers. If oil prices remain elevated by $30-35 a barrel for a full year, India could see an impact of $55-60 billion on its external balance, he said.