RBI MPC minutes reveal differences: More rate hikes or a pause?

The RBI raised the repo rate by 25 basis points to 5.50% earlier this month. It was the first-rate hike in nearly four years.

In Short

• RBI raised repo rate by 25 basis points to 5.50% after nearly four years
• Rising oil prices and poor monsoon push food inflation higher
• MPC members split on pace and extent of future rate hikes

The Reserve Bank of India (RBI) may need to raise interest rates further to control inflation, but an aggressive series of hikes could hurt economic growth, minutes of the Monetary Policy Committee (MPC) meeting released on Wednesday showed, according to Reuters.

The RBI's rate-setting panel unanimously raised the repo rate by 25 basis points to 5.50% earlier this month. It was the first-rate hike in nearly four years. The central bank also changed its monetary policy stance from neutral to calibrated tightening, signalling that rate cuts were unlikely in the near term.

Rising oil prices amid the Middle East war and deficient monsoon rainfall have pushed up food prices, increasing concerns about inflation. Markets have factored in slightly more than 100 basis points of rate hikes over the next 12 months.

INFLATION CONCERNS STRENGTHEN CASE FOR RATE HIKES

India's retail inflation rose to 5.54% in September, higher than expected and close to the RBI's upper tolerance limit of 6%.

The central bank expects inflation to average 6% in the October-December quarter. It has also raised its inflation forecast for the current financial year to 5.2% from 5% earlier.

The minutes showed that several members of the rate-setting panel were concerned about the spread of inflation across the economy. They also highlighted the need to act before rising prices become more difficult to control.

Deputy Governor Poonam Gupta indicated that further increases in the policy rate could be necessary to keep inflation under control and prevent inflation expectations from rising.

MPC member Saugata Bhattacharya also supported monetary tightening, pointing to the economic case for higher interest rates. However, he cautioned that raising rates too quickly could restrict economic growth.

The RBI raised its economic growth forecast by 40 basis points to 7.1% at its latest policy review, even as it increased its inflation projection.

MPC MEMBERS DIFFER ON EXTENT OF RATE HIKES

While there is concern about inflation, members of the rate-setting panel differ on how aggressively the RBI should raise interest rates.

MPC members Nagesh Kumar and Ram Singh opposed the change in the monetary policy stance. Singh warned that the shift could be interpreted as a signal of an extended rate-hiking cycle, which he felt was not justified at present, the report mentioned.

He favoured smaller, gradual increases in the repo rate rather than keeping interest rates high for an extended period. He also warned that expectations of aggressive monetary tightening could weaken consumer demand, including in sectors that are not directly sensitive to interest rates.

RBI Executive Director Indranil Bhattacharyya, meanwhile, favoured a more proactive approach to controlling inflation rather than waiting for further evidence before acting.

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