Reserve Bank of India Governor Sanjay Malhotra (File Photo) The Reserve Bank of India (RBI) is widely expected to increase its benchmark repo rate by 25 basis points to 5.50 per cent on Wednesday, marking its first rate hike in almost four years as policymakers respond to renewed inflation risks, higher crude oil prices and a weakening rupee. The move would mark a major shift in the central bank’s monetary policy approach under Governor Sanjay Malhotra, who assumed office in December 2024 and oversaw a series of rate cuts last year. Of the 40 economists surveyed by Bloomberg, 34 expect the six-member Monetary Policy Committee (MPC) to raise the repo rate by a quarter percentage point. The remaining economists expect the central bank to keep the rate unchanged. The MPC is also likely to retain its neutral stance, leaving room to respond to changing inflation and growth conditions. The economic backdrop has changed massively since the RBI’s August policy review. Inflation has picked up, crude oil prices have climbed back above $100 a barrel, and the US Federal Reserve has moved towards tighter monetary policy. Meanwhile, the rupee has weakened sharply, prompting the RBI to intervene in the foreign exchange market. India’s foreign exchange reserves also recorded their steepest weekly fall on record as the central bank stepped in to support the currency. With inflation approaching 5 per cent and projections indicating that price pressures could move closer to the upper end of the RBI’s 2 per cent-6 per cent tolerance range during the December quarter, economists believe the central bank may have to continue tightening monetary conditions after Wednesday’s decision. Gaura Sen Gupta, chief economist at IDFC First Bank, expects a “shallow” series of rate increases amounting to 75 basis points by February. She said the moves would be “aimed primarily at preventing the real policy rate from turning negative as inflation rises.” “A shift in stance could indicate a deeper tightening cycle, which appears unwarranted given that inflation remains primarily supply-side driven and growth faces two-sided risks,” Sen Gupta added, as per the report. The latest surge in crude prices has added another layer of uncertainty for the RBI. Escalating tensions in the Middle East have pushed oil above $100 a barrel, raising the risk of higher transportation, manufacturing and other input costs in an economy heavily dependent on imported energy. Food inflation could also become a concern. India has experienced its weakest monsoon in more than a decade, potentially putting pressure on food prices in the months ahead. Minutes from the previous MPC meeting indicated that policymakers were already monitoring the possibility that persistent inflation could require a monetary policy response. Governor Sanjay Malhotra is scheduled to announce the policy decision at 10 a.m. in Mumbai. Markets will be looking beyond the immediate rate move for signals on how far the RBI may go and whether policymakers believe inflation is beginning to broaden beyond supply-side pressures. Citigroup economist Samiran Chakraborty expects the RBI to increase its inflation forecast by around 10 basis points from 5 per cent. He also expects the central bank to raise its growth projection from 6.7 per cent for the financial year ending March 2027. India’s bond market has already started reflecting expectations of tighter monetary policy. The benchmark 10-year government bond yield is trading near 7.23 per cent, its highest level in around two-and-a-half years, after climbing almost 30 basis points since September. VRC Reddy, head of treasury at Karur Vysya Bank, expects the yield to remain around current levels if the RBI delivers the anticipated 25-basis-point hike while maintaining a neutral policy stance. Such an outcome, he believes, would point towards a limited tightening cycle.