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India interest rate rise: When will the Reserve Bank of India hike rates again this year?

By Fitri Wulandari

Edited by Jekaterina Drozdovica


Indian Rupee background, Indian Stock market data with Indian map, India Finance, Economic Background blue abstract illustration
Could another Indian interest rate rise be on the cards? Photo: iQoncept / Shutterstock

The Reserve Bank of India (RBI) lifted its benchmark interest rate for the fifth consecutive time on 7 December to curb stubbornly high inflation.

The inflation rate slowed to a three-month low in October, but remained above India’s central bank’s inflation target.

The RBI’s Monetary Policy Committee (MPC), which is responsible for setting the key interest rate, will hold its first meeting for 2023 in February.

Is an India interest rate rise still on the cards? In this article we discuss the role of the RBI, India’s interest rate history and the factors that shape India’s interest rate forecast.

What is the Reserve Bank of India?

The Reserve Bank of India (RBI) is the country’s central bank. Established on 1 April 1935 as a private entity, the RBI became fully government owned in 1949 following nationalisation. 

The Mumbai-based central bank’s main task is to form, implement and monitor the country’s monetary policy with the objective of maintaining price stability and growth. 

The RBI carries out its monetary policy duties through its six MPC members chaired by the central bank’s governor. The MPC meets at least four times a year to determine the policy repo rate aiming to meet the inflation target.

As a regulator and supervisor of India’s financial system, the RBI oversees guidelines for banking operations to maintain public confidence in the system, protect consumers’ interests and provide cost-effective banking services. 

By issuing new notes, and exchanging and destroying old ones, it ensures the adequate supplies of coins and currency notes in good condition. 

Once in five years, the government of India, in consultation with the RBI, sets the Consumer Price Index (CPI) inflation target.

On 5 August 2016, the target was set at 4% with a tolerance band of between 2% and 6% for the next five years ending 31 March 2021. In April 2021, it was decided to keep the target until 31 March 2026. 

The MPC uses several indirect monetary policy tools to keep inflation in check.

  • Repo Rate

This is the interest rate at which the Reserve Bank provides loans to all liquidity adjustment facility (LAF) participants in exchange for government and other approved securities as collateral. 

The LAF is the RBI’s operation through which it injects and absorbs liquidity into and from the banking system. It consists of overnight as well as term repo and reverse repos (fixed as well as variable rates), the Standing Deposit Facility (SDF) rate and the Marginal Standing Facility (MSF) rate. 

  • Standing Deposit Facility (SDF) Rate

The SDF is the rate at which all LAF participants’ overnight, non-collateralised deposits are accepted by the Reserve Bank. In addition to its function in managing liquidity, the SDF also serves as a tool for financial stability. 

A 25 basis-point spread separates the SDF rate from the policy repo rate. The SDF rate replaced the fixed reverse repo rate as the LAF corridor’s floor when it was introduced in April 2022. 

The LAF has the MSF rate as its ceiling and the SDF rate as the floor, with the policy repo rate in the middle.

  • Marginal Standing Facility (MSF) Rate

The MSF is the penal rate at which banks may borrow money from the Reserve Bank on an overnight basis by withdrawing funds up to a certain amount from their Statutory Liquidity Ratio (SLR) portfolio. 

It acts as a safeguard to protect the banking system from unplanned liquidity shocks. A 25-basis point premium over the policy repo rate is applied to the MSF rate.

India’s interest-rate history

Between April to August 2018, India raised interest rates twice, lifting the policy repo rate from 6% to 6.5% by August 2018 amid a rising inflation rate. The MPC maintained the rate until February 2019, when it was cut to 6.25% amid easing inflationary pressures. The rate cut continued into 2020. 

In March 2020, as the global economy came to a standstill following the emergence of the Covid-19 pandemic, the Reserve Bank of India interest rate was cut by 75bp to 4.4%. In May 2020, the committee cut the rate by another 40bp to help the economy weather the slowdown. 

India suffered the second highest number of Covid-19 cases and deaths after the US. Its economy contracted 6.6% in 2021. 

The MPC kept the key rate at the record-low 4% level unchanged until April 2022, as the country was recovering from the ripple effect of the pandemic.

India interest rate rise in 2022

In May 2022 the MPC started the policy tightening cycle amid soaring inflation that reached 7.9% in April – a level not seen since 2014. 

On 4 May the MPC lifted the policy rate by 40bp to 4.4%. The rate was hiked in June by 50bp and in August by another 50bp, reaching 5.4%. 

Will interest rates rise again in India in 2023?

When shaping its monetary policy, RBI’s MPC is monitoring a few data points, including the pace of price growth and economic health. Below are some of the factors that could inform Reserve Bank of India interest rates policy.

Inflation eases but above range

Inflation in India has been volatile. The pace of price rise peaked at 7.8% in April, easing to 6.71% in July, according to data from the country’s National Statistics Office. It rose again to 7% and 7.41% in August and September respectively, before cooling to 6.77% in October.

It has been above the RBI’s maximum 6% target every month since January 2022.


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The central bank expected inflation to average at 6.7% in 2022/2023, cooling to 5% in the first quarter of 2023/2024 (April-June 2023) and 5.4% in the second quarter, the RBI said in its December statement.

The inflation trajectory going ahead would be shaped by both global and domestic factors. In the case of food, while vegetable prices are likely to see seasonal winter correction, prices of cereals and spices may stay elevated in the near-term on supply concerns. High feed costs could also keep inflation elevated in respect of milk. Adverse climate events – both domestic and global – are increasingly becoming a significant source of upside risk to food prices.”
The bank added: “Global demand is weakening. Unabating geopolitical tensions continue to impart uncertainty to the food and energy prices outlook.”

Participants in the central bank’s Survey of Professional Forecasters (SPF) released on 7 December expected headline inflation to stay at 6.7% overall for 2022/2023, dropping to average 5.2% during 2023/2024.

Inflation for the first two quarters of 2023/2024 was projected to remain in the range of 5% to 5.2%, according to the survey, which polled 43 panellists.

CPI Inflation excluding food and beverages, pan, tobacco and intoxicants, and fuel and light, was predicted to ease to 5.9% in the final quarter of 2022/2023 from 6.1% in the third quarter. Core inflation was expected to drop further to 5.2% in the second quarter of 2023/2024.

ING Group’s forecast, as of 9 December, suggests inflation in India could average at 5.5% in 2023, easing to 4.4% in 2024 and 4% in 2025.

ABN-Amro expects India’s inflation to slow to 5.5% in 2023, from the estimated 7% in 2022.

Indian economic growth to slow

India’s economy was estimated to grow by 6.8% in 2022/2023, driven by primarily private consumption and investment, according to RBI’s forecast in December. Meanwhile, the RBI forecast real gross domestic product (GDP) growth to stand at 7.1% for the first quarter of 2023/2024, slowing at 5.9% in the second quarter of  2023/2024.

The median forecast of 43 participants in the central bank’s SPF expected India’s GDP growth to ease to 6% in 2023/2024, from the estimated 6.9% in 2022/2023.

ABN-Amro projected India’s GDP growth to fall to 5.5% in 2023, from 6.5% in 2022. ING forecast that it will increase within the next two year, forecasting 6.2% growth in 2023 and 6.8% in 2024, and rising to 7.5% in 2025.

The RBI mentioned several upside factors to support growth, including agricultural prospects, robust growth in manufacture and services sectors, and government support on investment.

“The biggest risks to the outlook continue to be the headwinds emanating from protracted geopolitical tensions, global slowdown and tightening of global financial conditions,” RBI said in the statement.

On 5 December, the World Bank lifted its forecast for India’s economic growth for 2022/2023 to 6.9%, from its previous forecast of 6.5% in October. The country’s economy was expected to slow to 6.6% in 2023/2024.

Various global headwinds, including intensifying geopolitical tensions, growing stagflationary, and worsening food insecurity may constrain private consumption and investment activity in the second half of 2022/2023 and 2023/2024.

Amid intensifying global headwinds, India is better placed than it has been in the past and compared to its peers to manage external macro-financial shocks. Macro-fiscal fundamentals are better than they were during the taper tantrum episode in 2013. The current account is adequately financed by stable foreign portfolio investment (FPI) inflows and stable FDI,” stated the World Bank’s India Development Update released on 5 December.

Monitoring food inflation

Food inflation is an important economic indicator used by the Indian government and the central bank. It is critical to keep an eye on domestic food prices in a country with the world’s second largest population. 

According to the US Department of Agriculture (USDA), food expenses account for 50% of average household spending in India. 

Food prices have surged since the end of 2021, bolstered by recovering domestic demand post-pandemic and supply disruptions, either caused by weather or international supply bottlenecks. The war in Ukraine has also increased food prices.

Rising global vegetable prices, for example, have affected the domestic prices of edible oils. India meets about two-third of its edible oil consumption through imports of palm, soybean and sunflower oil – all of which have seen a surge in price. 

The Indian government has imposed fiscal policies to contain food inflation, including scrapping import duty for crude palm oil, sunflower oil and soybean oil, and banning rice and wheat exports.

Food inflation contributed 48.3% of overall CPI inflation from January to October, according to India's Department of Economic Affairs in its October Monthly Economic Review. Food inflation was primarily driven by increases in the prices of imported food items such as oil and fats.

The Consumer Food Price Index, which measures the change in retail prices of food items consumed by Indians, eased to 7.01% in October from 8.60% in September. However, it was higher than 6.7% in August.

In any given month, food will almost certainly be either the main reason Indian inflation rose or the reason that it fell,” ING’s Head of Research Asia-Pacific, Robert Carnell, wrote on 12 October. 

“What this inflation release did not do, was suggest that Indian inflation is running out of control. The last four months of inflation increase on a sequential monthly basis, have been fairly steady at around 0.5-0.6%. Even if the price level continued to rise at this pace, year-on-year inflation would slowly drift down to around 6%,” he added. 

India interest rate forecast for 2023 and beyond

What is the outlook for the India interest rate? Participants in RBI’s survey forecast the country’s central bank would hike the policy repo rate to 6.75% by the end of the fourth quarter of 2022/2023 (January to March 2023). India interest rate was expected to remain unchanged until the second quarter of 2023/2024 (July to September 2023).

Bank of America (BofA) Global Research’s India interest rates forecast saw a 25bp hike in RBI’s meeting on 8 February 2023 and another 25bp in 2023.

“As growth resilience continues to offer comfort to the RBI, the quest to secure the 4% target would mean a higher terminal rate. Given the uncertain world, there are many headwinds to growth and inflation outlook which is why the RBI MPC is expected to be nimble and data dependent,” analysts at BofA wrote on 7 December.

ANZ Research expected interest rate hike in India to continue at a smaller increase of 25bp in February 2023.

“The RBI rightly did not signal any doveishness yet, despite tempering the size of its rate hike. Inflation is broadly evolving according to their expectations but remains quite elevated. India’s growth pulse is very strong, especially compared with the rest of the world. High core inflation needs to be brought down and therefore further hikes will be needed,” ANZ Research’s Economist Dhiraj Nim and Chief Economist Southeast Asia and India, Sanjay Mathur wrote in a note on 7 December.

In its India interest rate predictions, ING forecast India’s interest rate to average 6.15% in the first quarter of 2023 and gradually fall to 5.15% in the fourth quarter of 2023. The Dutch lender projected RBI’s interest rate would be cut to 4.9% in the first quarter of 2023 and to remain at that level until the fourth quarter of 2025.

The bottom line

In their India interest rate forecast, analysts expected the RBI to hike the policy repo rate at least until the first quarter of the financial year 2023/2024, as inflation is anticipated to remain elevated.   

Remember that analysts’ predictions can be wrong. You should always conduct your own research before trading, looking at the latest news and analysts’ commentary, together with fundamental and technical analysis.

Remember, past performance does not guarantee future returns. And never trade money you cannot afford to lose.


Will interest rates go up in India?

Analysts mentioned in this article expected that persistently high inflation could force the RBI to continue hiking the policy repo rate. Remember, analysts’ predictions can be wrong.

How high will interest rates go in India?

RBI survey participants forecast the country’s central bank would raise the policy repo rate tothe policy repo rate to 6.75% by the end of the fourth quarter of 2022/2023 (January to March 2023) and keep it at that level until the second quarter of 2023/2024 (July to September 2023). Note that their views can be wrong.

Why does India have high interest rates?

India’s interest rate rises aims to combat persistently high inflation. India’s inflation rate target currently stands at 6%.

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