India's central bank raises its policy rate for the first time in nearly four years

The Reserve Bank of India raised its policy repo rate by 25 basis points to 5.50 per cent on 7 October 2026, the first increase in nearly four years. The decision closed the 63rd meeting of the Monetary Policy Committee, held from 5 to 7 October under the chairmanship of Governor Sanjay Malhotra. According to the RBI's published resolution, the six members voted unanimously for the rate rise, but the accompanying switch of stance from neutral to calibrated tightening carried only by majority: Dr Nagesh Kumar and Prof Ram Singh were of the view that the stance be retained at neutral. Reuters reported that nearly 60 per cent of the economists it surveyed had expected the move. The turn matters less for its size than for what the central bank said follows it.

A unanimous rise and a divided stance

The mechanics are in the RBI's resolution. With the repo rate at 5.50 per cent, the standing deposit facility rate stands adjusted to 5.25 per cent and the marginal standing facility rate and the Bank Rate to 5.75 per cent. The last increase was in February 2023, when the committee took the repo rate to 6.50 per cent. The RBI then cut by a cumulative 125 basis points through 2025 to 5.25 per cent, holding there for four consecutive meetings before Wednesday.

The projections explain the vote. The RBI now expects CPI inflation to average 5.2 per cent in 2026-27, with 4.9 per cent in the second quarter, 6.0 per cent in the third, 5.7 per cent in the fourth and 5.6 per cent in the first quarter of 2027-28. Core inflation is projected at 4.4 per cent. Reuters reported both figures were revised up, from 5.0 and 4.3 per cent. Real GDP growth is projected at 7.1 per cent for 2026-27, with 7.2 per cent in the second quarter, 6.9 per cent in the third and 6.8 per cent in the fourth; first-quarter growth came in at 7.8 per cent, above the RBI's earlier forecast. Growth at that level gave the committee room to move on prices.

In his statement, Malhotra said headline CPI inflation is expected to average almost 5.8 per cent in the next three quarters and that, in that setting, recalibrating the policy rate was imperative. He added that rate cuts are off the table in the near term and that policy action ahead can only be a rate hike or a pause. Consumer inflation had reached 4.82 per cent in August, above the 4 per cent medium-term target for a third month, Reuters reported. Sakshi Gupta of HDFC Bank told Reuters she expects a further 50 to 75 basis points of increases. The committee next meets from 2 to 4 December 2026.

Oil is the transmission channel

The resolution attributes the shift in the global backdrop to the re-escalation of the conflict in West Asia and the consequent sharp volatility in crude oil prices. The figures in the Governor's Statement measure the shock: the Indian basket of crude oil averaged US$82.0 per barrel in July 2026, US$90.2 in August and US$116.1 in September. For an economy importing most of its crude, a move of that scale reaches fuel prices, transport costs and the trade account within a quarter.

The source of the move is maritime rather than geological. Al Jazeera reported on 6 October that Brent crude was trading at US$99.57 a barrel and West Texas Intermediate at US$88.37, against roughly US$72 before the war began, with the gap explained largely by shipping and insurance costs. It also reported at least one tanker attack a day since 2 October across the Strait of Hormuz and the Gulf of Aden, citing Kpler data showing Gulf oil flows excluding Iran had recovered to more than 81 per cent of pre-war levels in September. Volumes are returning; the risk premium is not.

The external account and the rupee

The Governor's Statement puts India's current account deficit at 0.5 per cent of GDP, or US$4.2 billion, in the first quarter of 2026-27, which the RBI calls modest and well below sustainable levels. Merchandise exports grew 22.8 per cent to US$88.1 billion in July and August 2026 while imports rose 15.8 per cent to US$146.9 billion, driven by electronic goods and petroleum. Reserves stood at US$734.6 billion on 2 October, about 11 months of import cover, and foreign portfolio investment recorded net outflows of US$10.3 billion between April and 5 October.

The currency has absorbed the difference. Reuters reported the rupee hovering around 96.43 to the dollar after the decision, close to record lows, and the benchmark ten-year yield rising to 7.2269 per cent. Malhotra said the RBI remains committed to orderly adjustments to the exchange rate in line with underlying macroeconomic fundamentals, and pointed to measures suggesting the rupee is not overvalued. A tightening cycle that does not lift the currency is aimed at domestic prices, not the exchange rate.

What the decision forecloses

The trade settlement with Washington sits behind this. The White House fact sheet of 9 February 2026 recorded the reciprocal tariff on Indian goods cut from 25 to 18 per cent and the additional 25 per cent duty removed in recognition of India's commitment to stop purchasing Russian oil. That commitment shifts Indian refiners towards barrels priced off a Gulf benchmark at the moment the Gulf benchmark carries a war premium. The Governor's Statement cites the India-UK trade deal and other recent bilateral treaties as supporting resilience, but diversified export markets do not offset an import bill set by Hormuz.

The practical consequence is the loss of optionality. With the stance at calibrated tightening and the Governor saying the next move can only be a hike or a pause, the RBI has no scope to cut into a growth slowdown until the inflation path turns, and its own projection does not have that happening before the fourth quarter of 2026-27. Alongside the resolution the RBI announced inter-operability among NBFC Account Aggregators by 31 December 2026. That does not change the arithmetic: for the next two quarters India's monetary policy is being written in the Strait of Hormuz.

Sources

• Reserve Bank of India — Monetary Policy Statement, 2026-27: Resolution of the Monetary Policy Committee, October 5 to 7, 2026
• Reserve Bank of India — Governor's Statement, October 7, 2026
• Reserve Bank of India — Press Releases (October 2026)
• Reuters — India joins global rate-tightening wave with first hike in nearly 4 years (via Yahoo Finance)
• Reuters — India raises policy rate by 25 bps in first hike in nearly four years (via Investing.com)
• Al Jazeera — Hormuz ship attacks surge: Are increased oil exports sustainable?
• Al Jazeera — Is Iran charging a toll to allow oil traffic through Hormuz?
• White House — Fact Sheet: The United States and India Announce Historic Trade Deal