Members of India’s rate-setting panel see further interest rate hikes as a possibility to curb inflation, but they are wary of an aggressive tightening cycle because of the risks to economic growth. The India rate panel minutes, released on Wednesday, give the clearest picture yet of how the Reserve Bank of India’s Monetary Policy Committee is thinking about prices and growth.
Earlier this month, the six-member committee unanimously raised the repo rate by 25 basis points to 5.50 per cent, its first hike in nearly four years. It also shifted its stance to “calibrated tightening” from “neutral”, and Governor Sanjay Malhotra said the shift essentially signalled that rate cuts were off the table. The India rate panel minutes released on Wednesday explain why the committee made that move.
The India rate panel minutes show that most members agreed prices were becoming a broader problem, even if they differed on how far rates would need to rise. Markets have already priced in a little over 100 basis points of hikes over the next 12 months.
What the India rate panel minutes reveal
Malhotra warned in the minutes that inflation was spreading beyond a few items. “There are increasing signs of generalisation of inflation,” he said, pointing to the jump in food prices after a deficient monsoon and a sharp rise in oil prices linked to the Middle East war.
Deputy Governor Poonam Gupta took a similar line and suggested the committee should not wait for more proof before acting again. “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,” she said. “It is conceivable that a further increase in the policy rate might be needed to keep inflation low and inflationary expectations anchored.”
The panel stopped short of endorsing a sharp cycle of hikes, though. Several members flagged the risk that raising rates too fast could hurt growth at a time when the economy still faces pressure from high fuel costs and weak global demand.
Inflation pressure behind the India rate panel minutes
The numbers explain why the committee is leaning toward more tightening. Domestic retail inflation accelerated to a higher-than-expected 5.54 per cent in September, nearing the central bank’s 6 per cent tolerance ceiling and strengthening the case for further hikes.
The Reserve Bank expects inflation to average 6 per cent in the ongoing October-December quarter, according to its latest projections. It also raised its average inflation forecast for the current financial year to 5.2 per cent from 5 per cent, while nudging up its economic growth forecast by 40 basis points to 7.1 per cent.
Food prices have been the main driver of the jump, after below-normal monsoon rains hit farm output. Oil prices have added to the pressure, since India imports most of the crude it uses and higher fuel costs feed into transport and manufacturing costs across the economy.
What comes next after the India rate panel minutes
After reading the India rate panel minutes, analysts expect the tightening to continue. HSBC expects a 50-basis-point hike in December, joining the State Bank of India’s call for a larger move, Reuters reported. The swaps market is also pricing in the chance of a bigger increase at the next policy review.
A decision on rates is taken by the six-member panel, which includes three external appointees alongside the Governor and two RBI officials. The committee meets next in December, and the India rate panel minutes from that meeting will show whether the members hardened their view on further hikes.
The caution in the minutes matters for borrowers as well as investors. Each rate hike feeds into lending rates across the banking system, raising the cost of home, car and business loans. The committee’s worry about growth suggests it will move in small steps rather than large ones, unless inflation data forces its hand.
For now, the message from the India rate panel minutes is clear: rates are more likely to go up than down, but the path will be gradual and data-dependent.