MUMBAI: Reserve Bank of India (RBI) Governor Sanjay Malhotra flagged growing signs of broadening inflationary pressures, while keeping the door open for further rate hikes or a pause depending on evolving economic conditions, according to the minutes of the October 5-7 Monetary Policy Committee (MPC) meeting released on Wednesday.
Malhotra said the shift to a calibrated tightening stance signalled that rate cuts were off the table in the near term. However, the pace and duration of further rate hikes would depend on inflation trends, the spread of price pressures, second-round effects of supply shocks and demand conditions.
“The duration and extent of the rate hiking cycle would be contingent on the actual growth-inflation developments and outlook, especially that of underlying inflation, the broadening of price pressures, second round effects of the supply shock, and the impact of demand impulses,” Malhotra said.
While all six MPC members unanimously voted to raise the repo rate by 25 basis points to 5.50%, the committee was divided over the shift in policy stance. Two external members, Nagesh Kumar and Ram Singh, favoured retaining the neutral stance, citing geopolitical uncertainties and concerns that prolonged monetary tightening could undermine growth.
Singh cautioned that shifting to a tightening stance could signal an extended cycle of rate hikes, potentially eroding the benefits of recent growth-supportive monetary and fiscal measures.
“I do not favour shifting the stance from neutral to tightening mode, as it may signal an extended cycle of rate hikes,” Singh said.
He argued that inflation was largely driven by supply-side factors, including rising fuel, food and commodity prices, rather than excessive demand. Traditional signs of economic overheating, such as a wage-price spiral, capacity constraints or unusually strong private consumption and investment, were largely absent.
Singh pointed out that GDP growth of 7.8% in the first quarter was broadly in line with the average growth of 7.9% during FY22-FY26. He warned that growth could moderate in the coming quarters, particularly in interest rate-sensitive sectors such as automobiles and real estate, as the impact of GST-related measures faded.
Expectations of significant rate increases could weaken demand and derail the nascent recovery in private investment, he said. With agriculture already under pressure from deficient rainfall and El Niño conditions, further tightening could squeeze corporate profitability and weigh on capital expenditure plans.
Kumar echoed these concerns. “In view of the continued geopolitical and trade policy uncertainties, I feel that a neutral stance remains appropriate,” he said.
He acknowledged that the inflation outlook had worsened due to deficient monsoon rainfall, rising crude oil prices, elevated precious metal prices and rupee depreciation. These factors prompted an upward revision in the FY27 headline inflation forecast to 5.2% from 5%, while core inflation was projected at 4.4%.
However, Kumar maintained that inflation remained predominantly supply-driven, with little evidence of economic overheating or broad-based price pressures.
In contrast, MPC member Saugata Bhattacharya argued that monetary conditions remained too accommodative, with emerging signs of inflation becoming entrenched. He said resilient economic growth provided room to focus more firmly on containing persistent price pressures and supported the shift to calibrated tightening.
RBI Executive Director Indranil Bhattacharyya also backed the stance change, warning that persistent supply-side pressures, coupled with strong domestic demand, could intensify inflation.
He pointed to growing evidence of companies passing higher input costs on to consumers, particularly in segments such as restaurants and cooked meals.
With inflation expected to average around 5.8% over the next three quarters, Bhattacharyya favoured pre-emptive action rather than waiting for price pressures to become more widespread. He also ruled out rate cuts in the near term.
RBI Deputy Governor Poonam Gupta supported the shift, warning that inflation could approach the upper tolerance limit of 6%. She argued that monetary policy needed to act before price pressures became entrenched, given the lag with which interest rate changes affect the economy.
“The pace, extent, and duration of such actions would depend on the incoming data on inflation, its diffusion, and evidence of second-round effects,” Gupta said.
Sanjay Malhotra, RBI Governor: “Headline CPI is projected to touch the upper tolerance band in Q3 and remain significantly above 5% in the next two quarters.”
Poonam Gupta, RBI Deputy Governor: “At some point, a larger pass-through of input costs to output prices may materialise.”
Indranil Bhattacharyya, RBI Executive Director: “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.”
Saugata Bhattacharya, External Member: “A data dependent approach is best to deal with the broad range of possible outcomes in this uncertain economic environment.”
Nagesh Kumar, External Member: “While inflation is driven largely by supply-side factors and does not show any signs of overheating of the economy nor of generalisation, it is important to manage inflationary expectations.”
Ram Singh, External Member: “MPC will have to remain vigilant about the pace of inflation generalisation to respond in a timely and effective way. For now, there is a case for incremental, mild repo rate hikes, not high-for-long rates.”
Source: The Financial Express
