The Reserve Bank of India has raised its benchmark repo rate by 25 basis points to 5.5 percent. It is the central bank’s first rate increase in nearly four years.
The decision was taken by the Monetary Policy Committee as inflationary pressures increased in recent months. The RBI has also changed its policy stance from neutral to calibrated tightening.
Consumer inflation reached 4.82 percent in August, remaining above the RBI’s medium-term target of 4 percent for the third consecutive month.
Higher oil prices have added to inflation concerns. Global energy markets have remained under pressure amid the wider conflict in the Middle East.
The RBI has raised its inflation forecast for the current financial year to 5.2 percent. The central bank will continue monitoring food prices, energy costs and other factors affecting inflation.
At the same time, the RBI has maintained a positive outlook for India’s economic growth. It has raised its GDP growth forecast for the financial year to 7.1 percent.
The rate increase could affect borrowing costs for households and businesses. Banks may adjust lending rates following the change in the central bank’s benchmark rate.
Home loan borrowers, personal loan customers and businesses with floating-rate loans could therefore see changes in their interest costs.
The RBI has kept the Cash Reserve Ratio unchanged at 3 percent. Instead, it plans to use other liquidity-management tools to manage money available in the banking system.
The decision also comes as the Indian rupee remains under pressure against the US dollar. Global oil prices and international capital flows remain important factors for the currency.
The RBI said future policy decisions will depend on incoming inflation and growth data. The latest increase marks a shift after a long period without a repo-rate hike.
Markets are now expected to closely watch the RBI’s next policy decisions. Any further increase will depend on how inflation and economic conditions develop.
For consumers, the immediate impact will depend on how banks transmit the rate increase to their lending rates.