The Reserve Bank of India (RBI) has ended its three-year pause on interest rates, delivering a quarter-percentage-point increase on Wednesday as the fallout from the Iran war pushes up prices and weighs on the national currency. The central bank's monetary policy committee voted unanimously to lift the benchmark repo rate — the rate at which it lends to commercial banks — to 5.50%.
The decision places India alongside several other central banks that have tightened policy to combat inflation or defend their currencies. The RBI had kept rates unchanged since the conflict erupted in February, monitoring how oil price swings would affect the world's fastest-growing major economy.
Robust economic growth in the last quarter gave policymakers room to shift their focus to rising prices. India relies on imports for the bulk of its energy needs, and a weak monsoon threatens to push up food costs further. Consumer price inflation climbed to 4.82% in August, exceeding the central bank's medium-term target of 4% for a third consecutive month, with data suggesting price pressures are no longer confined to food and transport.
Rupee under pressure
The RBI is also contending with a sliding rupee, which has hovered near all-time lows in recent days. To support the currency, it has introduced measures to attract US dollars, including a deposit scheme aimed at Indians living abroad that drew in about $127 billion (€113bn). Those efforts temporarily halted the rupee's decline, but renewed selling by overseas investors and oil prices near $100 per barrel have put it under fresh strain.
As the world's third-biggest oil importer, India typically sources around half of its crude via the Strait of Hormuz — a route that has been all but shut since the conflict began. That leaves India among the economies most exposed to a global energy shock, analysts say, with costlier crude and fertiliser inflating its import bill.
The rate hike comes as eurozone inflation also surged, reaching 3.8% in September, driven by energy costs. European policymakers are watching the situation closely, as the conflict in the Middle East continues to disrupt global supply chains and energy markets.
India's move is a reminder that the war's economic consequences extend far beyond the region. For Europe, which is already grappling with its own inflationary pressures, the ripple effects of higher oil prices and supply disruptions are a growing concern. The control of Europe's emergency oil reserves has become a key question as governments weigh releasing stocks to stabilise markets.
Analysts note that India's exposure to the Strait of Hormuz makes it particularly vulnerable to supply disruptions. The warning from Aramco that global oil reserves may take two years to rebuild underscores the long-term challenges facing import-dependent economies.
The RBI's decision is likely to have implications for global markets, as investors reassess the outlook for emerging economies amid rising geopolitical tensions. For now, India's central bank is prioritising price stability, even if it means sacrificing some short-term growth momentum.
