The Reserve Bank of India raised its benchmark interest rate by 25 basis points to 5.50% on Wednesday, its first increase in nearly four years, and signalled that further hikes could follow as rising inflation and a weakening currency prompt a policy pivot.

The six-member Monetary Policy Committee (MPC) voted unanimously to raise the repo rate, the first such increase since Governor Sanjay Malhotra took office in December 2024. While the move was widely expected, the central bank sprang a surprise in shifting its stance towards "calibrated tightening", effectively ruling out a rate cut in the near term.

"Rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook," Malhotra said announcing the MPC decisions.

The governor, however, cautioned that the timing and extent of any further tightening would depend on the evolution of inflation and growth, particularly underlying price pressures and the extent to which supply shocks become embedded in the broader economy.

With the decision, India has joined major central banks in raising rates as higher oil prices triggered by the Iran war fuel inflation, squeeze purchasing power and weigh on currencies. Compounding the price pressures is weak rains linked to El Nino.

Inflation pressures have broadened even as economic activity remains resilient. Consumer-price inflation rose to 4.82% in August, above the RBI's 4% medium-term target for a third consecutive month, while core inflation accelerated to 4.2%.

The central bank said inflation risks were no longer as benign as they had been a year earlier, pointing to higher food and fuel prices, deficient monsoon rainfall, El Nino conditions, and renewed volatility in international oil prices.

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