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Summary
Interest rates across the world are starting to rise again. The ECB increased its benchmark rate by 25 basis points for the first time in three years, after the central banks of Indonesia, the Philippines and Sri Lanka had already hiked interest rates.
On Thursday, the European Central Bank (ECB) raised benchmark interest rates for the euro zone, joining a growing number of global central banks tightening their monetary policies.
As the era of cheap money winds down, Mint explains why interest rates are surging worldwide and how this global shift will impact India's economy, markets, and borrowing costs.
How have global interest rates moved over the past few years?
Between 2008 (immediately after the global financial crisis) and 2022, the world enjoyed a prolonged era of cheap money, i.e low Interest rates. In the US, rates were as low as zero to 0.25% in that period, a trend mirrored across most developed economies.
This low-rate era ended following the covid pandemic. Massive government stimulus packages triggered a severe post-pandemic inflation surge, which was further aggravated by the outbreak of the Russia-Ukraine war. Central banks aggressively hiked rates to combat this. In the US, the benchmark rate jumped to a 22-year high of 5.25% to 5.5% by the end of 2023. As inflation began to cool, monetary policy began to ease, bringing US rates down to a more moderate 3.5%-3.75% by the end of 2025.
What about India?
In India, interest rates followed a different path. The benchmark interest rate (repo rate) was 9% in July 2008 when the global financial crisis struck. The Reserve Bank of India (RBI), like other central banks, cut the repo rate aggressively to 4.75% by April 2009 to support growth. But unlike the rest of the world, interest rates did not remain low in India. Inflation began to rise in 2010, and in 2011 the RBI increased rates to 8.5%. It cut interest rates sharply when the pandemic struck in 2020, but raised it again as inflation reared its head. The repo rate was 5.25% at the end of 2025.
What’s happening now?
Interest rates across the world are starting to rise again. The ECB increased its benchmark rate by 25 basis points (bps) for the first time in three years, after the central banks of Indonesia, the Philippines and Sri Lanka had already hiked interest rates. As the US Federal Reserve meets later this week, hopes of a rate cut have vanished and speculation is mounting over a potential rate hike later this year.
What’s triggering the rate hikes?
The primary driver is a fresh wave of inflation fueled by high energy costs, sparked by the ongoing West Asian crisis. The closure of the Strait of Hormuz has sent prices for crude oil, natural gas, and other key commodities soaring, pushing inflation well above the comfort zones of central banks in most developed nations.
An overheating US labour market is compounding this. The American economy added an average of 188,000 jobs per month over the past three months—three times the number it added during the same period last year.
How will this affect India?
Last week the RBI held the repo rate at 5.25%. Though inflation is within its comfort zone, with the consumer price index inflation expectd at around 4% in May, the RBI is worried about rising inflationary pressures due to higher fuel prices and a potentially poor monsoon. The central bank expects inflation to rise to 5.1% in FY27.
So far it has refrained from increasing rates to support the rupee, which has fallen 6% against the US dollar since the end of February. But if the US Fed starts to increase rates, the RBI will have little choice but to follow suit to maintain the interest-rate differential and prevent larger capital outflows.
About the Author
N Madhavan
N Madhavan has been writing on business and economy for more than 30 years now. A Chevening Scholar, he loves longform writing and has had the privilege of honing his skills at The Economist as an intern in the past. He writes across various sectors, with a primary focus on macro-economy, business groups in southern India, and corporate stories. He has worked in newspapers as well as magazines, with bylines in The Financial Express, Business Today, Forbes India and The Hindu BusinessLine. This is his fourth year at Mint where he presently curates the explanatory Primer section and also writes Long Stories. <br><br>Based in Chennai, he is the winner of the Shriram-Sanlam Award for Business Journalism. He loves ground reporting, including travelling in a truck twice between Chennai and Mumbai, to bring life to the stories he works on. He was once almost lynched while reporting on onion prices at Lasalgaon in Maharashtra, a fact he captured in the story he eventually wrote for Business Today. <br><br>Apart from writing, he loves reading, listening to music (Ilayaraja is his favourite composer) and travelling.
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