The Reserve Bank of India on Wednesday increased the repo rate by 25 basis points to 5.50 percent. This is the first rate hike in nearly four years. In fact, rising inflation and a weakening rupee forced policymakers to change their strategy. With a split vote of 4-2, RBI’s six-member Monetary Policy Committee (MPC) changed its stance from ‘neutral’ to ‘calibrated tightening’, indicating that further rate hikes remain likely in the future.

Announcing the decision, RBI Governor Sanjay Malhotra mentioned four major challenges facing the global economy. In a televised statement from the RBI headquarters in Mumbai, Malhotra said conflicts in West Asia, tariff uncertainties, rising bond yields and the risk of a major correction in the valuation of AI stocks are tightening the global economic environment, leading to risk aversion to emerging economies.

Conflict in West Asia

Malhotra said that since the last MPC meeting in August 2026, the global economy has been in a state of volatility due to renewed conflict in West Asia and sharp fluctuations in crude oil prices. He said that despite these challenges, the global growth rate is strong.

Malhotra said rising energy costs and rising food prices are expected to push up global inflation, prompting major central banks to tighten monetary policy.

He said that although these factors are adversely affecting the domestic growth and inflation outlook, the inherent strength and resilience of the Indian economy is helping it through these challenging times.

He further said that we will implement policies that will further enhance this flexibility. Accordingly, we will strive for price and financial stability. Both are essential for sustainable development in the long run.

Uncertainties related to tariffs

Pointing to “prolonged trade uncertainty” around the world, the governor said tariff-related threats and other major economic challenges were weighing on global market mood.

Recently, there is a new American law that paves the way for imposition of 100 percent tariff on Indian goods. New Delhi continues to buy oil from Moscow. This potentially heavy tax goes against New Delhi’s efforts to secure better tariff terms in trade deals with the US than with other economies such as Vietnam and China.

Increase in bond yields

Malhotra pointed to another, ‘rise in bond yields’. He said rising bond yields in developed economies and a stronger dollar were making the mood “nervous and weak” in global financial markets. Bond yields around the world have risen in recent weeks, driven by expectations that central banks will raise interest rates and concerns about government finances.

In late September and early October, the 10-year US Treasury yield rose to 5.3 percent, its highest level since 2002, while yields in Germany, France, the UK and Japan also hit multi-decade highs.

According to a report by ICICI Bank Research, the global fiscal deficit is expected to be around 5.2 percent of GDP in 2026, about 170 basis points higher than the pre-pandemic level, while global public debt is expected to exceed global GDP by 2030.

Fluctuations in AI stocks

A new cause for concern is the rapid increase in investment in AI infrastructure. Malhotra said the risk of a major fall in the valuation of AI stocks along with other global risks is adding to the uncertainty and keeping the economic environment sluggish.

Last month, AI-related stocks around the world fell sharply as leaders of the largest artificial intelligence companies warned of major existential risks associated with the technology. This shook confidence in an industry whose massive infrastructure spending had driven stock markets around the world to record highs.

The sale has huge implications across the industry, where companies increasingly rely on debt and revolving credit to fund their big AI spending plans, while global borrowing costs (reflected in multi-year high bond yields) continue to rise.

Anthropic CEO Dario Amodei shared a lengthy article on X on Saturday. In this he asked AI companies to slow down the pace of increasing the capabilities of the models, as the fear of misuse of AI is increasing. Elon Musk, who runs xAI, and Sam Altman, CEO of OpenAI, both said they agree with Amodei. Altman also said the company will not launch an IPO this year due to security concerns.