India’s central bank is poised to raise interest rates for the first time in nearly four years on Wednesday as rising inflation and a rupee near record lows force policymakers to shift gears.

A hike would put the Reserve Bank alongside Asian peers that have already begun tightening and mark the first such move under Governor Sanjay Malhotra, who took office in December 2024 and oversaw a series of cuts last year.

Of the 40 economists surveyed by Bloomberg, 34 expect the six-member Monetary Policy Committee to raise the benchmark repurchase rate by a quarter point to 5.50%, with the remainder predicting no change. The committee is expected to retain a neutral policy stance, keeping its options open for further moves.

Since the RBI’s last policy meeting in August, inflation has accelerated further, oil prices have surged back above $100 a barrel, the US Federal Reserve has begun tightening, and the rupee has weakened. Foreign exchange reserves posted a record weekly decline as the RBI intervened to prop up the currency.

With inflation nearing 5% and expected to climb closer to the upper end of the RBI’s 2%-6% tolerance band in the December quarter, economists see more tightening beyond Wednesday. A resilient economy gives policymakers scope to lift borrowing costs without significantly denting growth.

Against that backdrop, Gaura Sen Gupta, chief economist at IDFC First Bank, expects a “shallow” path of rate increases totaling 75 basis points by February, “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.

Escalating conflict in the Middle East has pushed crude back above $100 a barrel, threatening higher costs across an economy that imports most of its energy, while India’s weakest monsoon in more than a decade could put further pressure on food prices. Minutes of the last policy meeting showed policymakers were already concerned that persistent inflation could warrant action.

Malhotra will announce the decision at 10 a.m. in Mumbai. Beyond the rate move, investors will be watching for clues on the pace and size of any further increases and whether policymakers see inflation spreading more broadly through the economy.

Citigroup Inc.’s economist Samiran Chakraborty expects the central bank to raise its inflation projection by about 10 basis points from 5% while upgrading India’s growth forecast from 6.7% for the fiscal year through March 2027.

Bond markets are already pricing in tighter policy. The benchmark 10-year yield is near a 2-1/2-year high of 7.23%, up almost 30 basis points since September. VRC Reddy, head of treasury at Karur Vysya Bank, expects the yield to settle around that level if the RBI delivers the expected quarter-point hike while retaining a neutral stance, signaling a shallow tightening cycle.

“If the RBI sends a more hawkish signal by moving towards a tighter stance on rates and liquidity, the yield could move towards 7.38-7.40% in coming months,” he said.

Not everyone is convinced the RBI needs to raise rates yet. Oxford Economics’ Alexandra Hermann Prasad argues core inflation, which strips out volatile food and fuel components, remains benign and gives the central bank room to support growth for longer.

The rate decision comes as foreign investors have pulled a record amount from Indian equities this year led by elevated US yields, high oil prices and a weaker rupee. The NSE Nifty 50 has fallen for eight consecutive weeks, its longest losing streak in 25 years.

Policymakers are also grappling with a large pool of excess cash that is keeping overnight borrowing costs below the policy rate and making financial conditions easier than intended.

Much of the surplus stems from the RBI’s push in June to attract foreign-currency deposits to support a depreciating rupee. The move brought in about $133 billion, far exceeding initial expectations of $50 billion-$85 billion. The inflows helped bolster India’s external buffers but also injected a large amount of liquidity into the banking system just as inflation pressures were building.

The central bank has already drained more than 1 trillion rupees ($10.4 billion) through bond sales and other measures. Traders will be watching Malhotra for clues on how aggressively the RBI intends to absorb the remaining surplus alongside any increases in borrowing costs.

Economists at Barclays Plc. led by Aastha Gudwani expect the RBI to continue absorbing liquidity through open market operations and currency swaps. A cash reserve ratio increase remains an option too but is less likely given the permanent nature of the tool, they said.