The Reserve Bank of India raised its benchmark repo rate by 25 basis points to 5.5 percent on October 7. This is the first rate increase in nearly four years.

All six members of the Monetary Policy Committee voted in favour of the hike. The committee also shifted its stance to "calibrated tightening" from neutral. This signals that controlling inflation now takes priority over supporting growth.

Governor Sanjay Malhotra said the outlook for inflation is no longer benign. Consumer inflation rose to 4.82 percent in August, staying above the RBI's 4 percent target for the third month in a row. Higher oil prices linked to the Iran war and weak El Nino monsoon rains have added to price pressures.

The economy remains strong at the same time. Growth in the April-June quarter stood at 7.8 percent, well above the central bank's forecast of 7 percent.

Markets reacted cautiously. The Nifty 50 fell 0.6 percent, the Sensex declined 0.7 percent, and the 10-year bond yield rose to 7.2655 percent.

The RBI raised its inflation forecast for the year to 5.2 percent and its growth forecast to 7.1 percent. Economists say more hikes could follow if price pressures persist.