MUMBAI, Oct 21 (Reuters) – Members of India’s rate-setting panel indicated that further rate hikes may be needed to curb inflation but stopped short of endorsing an aggressive tightening cycle over risks to economic growth, minutes of the committee’s meeting released on Wednesday showed.
The Reserve Bank of India’s Monetary Policy Committee unanimously raised the repo rate by 25 basis points to 5.50% earlier this month, its first hike in nearly four years. It also shifted its stance to “calibrated tightening” from “neutral”, with Governor Sanjay Malhotra saying that the shift essentially signalled that rate cuts were off the table.
A sharp rise in oil prices due to the Middle East war and a deficient monsoon rain season have sparked a jump in food prices and stoked inflation worries, prompting markets to price in a little over 100 bps of hikes in the next 12 months.
“There are increasing signs of generalisation of inflation,” Malhotra said in the minutes.
Domestic retail inflation accelerated to a higher-than-expected 5.54% in September, nearing the central bank’s 6% tolerance ceiling and strengthening the case for further hikes.
The central bank expects inflation to average 6% in the ongoing October-December quarter, per its latest projections.
Considering this, “one may not want to wait for more definitive evidence of generalisation, and instead be mindful of the fact that monetary policy works with a lag”, Deputy Governor Poonam Gupta said.
“It is conceivable that a further increase in the policy rate might be needed to keep inflation low and inflationary expectations anchored.”
The central bank raised its average inflation forecast to 5.2% for the current financial year from 5% and nudged up its economic growth forecast by 40 bps to 7.1% at its policy review earlier this month.
“The totality of information indicates a strong economic case at this time for tightening monetary policy,” MPC member Saugata Bhattacharya said in the minutes. “At the same time, too rapid a policy rate adjustment risks constricting growth,” he added.
VIEWS DIFFER ON DEPTH OF HIKES
However, the rate panel members and economists are split over the extent of tightening that may ultimately be needed.
MPC members Nagesh Kumar and Ram Singh were both opposed to changing the monetary place stance, with Singh adding that the shift may signal an extended cycle of rate hikes — something that is not merited at the moment.
“For now, there is a case for incremental, mild repo rate hikes, not high-for-long rates,” Singh said in the minutes, pointing to how expectations of aggressive tightening can undermine demand even beyond rate-sensitive sectors.
Economists at Barclays have forecast two more rate hikes in the current cycle while their counterparts at Goldman Sachs expect at least three more, spread over December to June 2027. HSBC, meanwhile, has forecast an outsized 50-bp increase in December alone.
“I feel it is better to set aside the ‘cautiousness bias’ and act in a pre-emptive manner at this juncture rather than wait and watch,” RBI Executive Director Indranil Bhattacharyya said in the minutes.
(Reporting by Jaspreet Kalra; Editing by Janane Venkatraman)
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