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In his post-policy address, RBI Governor Sanjay Malhotra said the decision reflected challenging geopolitical developments, even as the Indian economy remained strong.
He said cuts were "off the table for now", with the central bank likely to either raise rates further or keep them unchanged to contain inflation.
The RBI projects Consumer Price Index (CPI) inflation at 5.2% for 2026-27 - higher than the 5% estimated earlier - to account for price pressure due to weather disruptions, weak monsoon and high volatility in international oil prices.
Crude oil prices are hovering above $100 (£75.33) a barrel resulting in India having to pay even more as the rupee has fallen close to its all-time lows against the dollar. The country imports around 90% of its crude oil and 50% of its gas needs.
The RBI last raised rates in February 2023, marking the end of its post-pandemic tightening cycle. During most of 2025, it cut rates to support economic growth before keeping policy unchanged from December 2025 until today's increase.
The rate increase is in line with expectations of economists who say that rising inflation makes a compelling case for it, especially since the economy has displayed enough resilience to absorb its impact without hurting growth.
It's also in line with what's happening globally. The US Federal Reserve has aggressively increased rates since 2022 pushing treasury bond yields higher. This, coupled with a strong dollar, has prompted investors to pull money from emerging markets such as India in search of higher returns in dollar assets.
On Wednesday, the RBI also upgraded its growth outlook after the economy outperformed expectations in the first quarter - the gross domestic product (GDP) growth in the current financial year is projected at 7.1%, up by 40 basis points from earlier estimate.
Governor Malhotra said the RBI would "strive for price and financial stability as both are essential for sustainable growth in the long run".
The RBI also signalled that it would use a mix of liquidity management tools to keep liquidity in check, while continuing to curb excessive volatility in the rupee.
Anuj Puri, chairman of real estate consulting firm ANAROCK Group, said the RBI rate hike may put pressure on consumer sentiment and discretionary spending. "The festive season is a key period for housing demand, and an increase in borrowing costs will affect buyer sentiment," he said.
