India's central bank raised its key policy rate by 25 basis points to 5.5% on Wednesday.

A Reuters poll of economists had already predicted a 25 basis point hike.

India has joined a number of major global central banks in tightening monetary policy to curb inflation.

The Reserve Bank of India raised interest rates on Wednesday, marking its first rate increase since 2023. India has joined the ranks of several major global central banks in tightening monetary policy to contain rising inflation. The central bank lifted the benchmark repurchase rate by 25 basis points to 5.50%, a one-year high, in line with the expectations of economists surveyed by Reuters.

Reserve Bank of India Governor Sanjay Malhotra said in remarks on Wednesday that despite multiple global challenges, India's economy remains strong, but he also noted: "Inflation and its outlook today are no longer as favorable as they were last year." Malhotra said the Monetary Policy Committee decided to adjust its policy stance to "prudent and gradual tightening."

The rate hike comes against the backdrop of persistently rising retail inflation in India, which reached 4.8% in August, above the central bank's medium-term target of 4%. The central bank expects core inflation to be 4.4% and headline inflation to be 5.2% in the current fiscal year ending March 2027. Malhotra said: "Under the current circumstances, rate cuts will not be considered in the near term, and the only policy options going forward are either raising rates or keeping them unchanged."

Both HSBC and Goldman Sachs expect the Reserve Bank of India to raise rates again in December. In a report released on Monday, HSBC said the market expects the Indian central bank to deliver a "convincing" rate hike to demonstrate its ability to raise rates again to suppress inflation. The report said that if the market interprets this rate hike as dovish amid a high and potentially persistent inflation environment, it would weaken India's appeal to global investors.

Although prolonged geopolitical conflicts, trade frictions, tightening global financial conditions, and high international commodity prices may drag on the economy, thanks to economic resilience, the Reserve Bank of India raised its growth forecast for the domestic economy by 40 basis points to 7.1%. India remains the fastest-growing major economy in the world and is also one of the countries most severely affected by the oil price shock brought about by the Iran war. The country relies heavily on oil imports, and the Strait of Hormuz was an important energy transport route before the conflict broke out.

India also faces the risk of an El Nino phenomenon this year. According to World Bank data, India has just experienced its fourth-driest June-August monsoon season since 1960, which could push up food prices. In a report released on Tuesday, the World Bank predicted that India's economic growth would slow to 7.1% in the current fiscal year ending March 2027, compared with 7.8% in the previous fiscal year. The report noted that "despite trade and geopolitical uncertainties, India's economy has performed better than expected," but growth will cool somewhat in the coming quarters.

In the second quarter of this year (April-June), while many major economies saw slower growth due to a deteriorating trade environment, geopolitical risks, and high energy prices, India delivered an impressive GDP performance. Last month, the Federal Reserve raised rates for the first time in more than three years and signaled it may continue to raise rates; the Bank of Japan also raised rates to a 31-year high as global energy price increases pushed up inflation. Over the past two months, the central banks of South Korea and the European Central Bank also announced rate hikes.

After the rate hike decision was announced, India's 10-year benchmark government bond yield rose 5 basis points to 7.243%; the Indian Nifty 50 stock index fell 0.7%.