RBI minutes point to more rate hikes as inflation risks broaden

Mumbai: The Reserve Bank of India’s (RBI) monetary policy committee (MPC) has warned that broadening price pressures could prolong its rate-hiking cycle, with policymakers flagging the risk that higher input costs will feed through to consumer prices and inflation expectations, minutes of its October meeting showed.

The minutes of the MPC’s 5-7 October meeting, released on Wednesday, showed increasing signs of inflation broadening across the economy. The share of items recording price increases above 4% rose to 37% in August from 20% in March, governor Sanjay Malhotra said.

Elevated global oil and commodity prices, coupled with a weakening rupee, could keep inflationary pressures high by raising import costs. The RBI is also watching for a wider pass-through of these costs to consumers, which could make inflation more persistent. Higher interest rates, in turn, could weigh on consumer demand and economic growth. Emkay Global Financial Services expects another 50 basis points of rate hikes in this cycle.

“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.

Earlier this month, the six-member MPC unanimously raised the policy repo rate by 25 basis points to 5.50%. The panel also shifted its stance to ‘calibrated tightening’ from ‘neutral’. External members Nagesh Kumar and Ram Singh opposed the change in stance, preferring to retain a neutral position even as they backed the rate increase.

The shift signals that rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving circumstances and the outlook, Malhotra said.

Malhotra said headline consumer price index (CPI) inflation was projected to touch the upper tolerance band in the December quarter and remain significantly above 5% in the following two quarters. Core inflation rose to 4.2% in August from 3.9% in July, while core inflation excluding precious metals increased to 2.9%, with strong monthly momentum.

“Underlying inflation, as measured by core ex precious metals is also anticipated to move above target in the coming months. This indicates a normalization of inflation from the benign levels seen earlier,” he said.

Other members

Other MPC members raised concerns about the persistence and transmission of inflationary pressures. Saugata Bhattacharya said data increasingly suggested that price pressures were becoming entrenched, with wholesale input prices running close to 9% year-on-year and evidence that businesses were passing higher costs on to consumers.

“Growth is resilient enough to permit a closer focus on an incipient inflation persistence,” Bhattacharya said, making the case for monetary tightening to bring inflation closer to target and anchor expectations.

Indranil Bhattacharyya also pointed to rising underlying inflation and the pass-through of input costs in segments such as restaurants and cooked meals. With demand remaining strong, he warned that the interaction of supply and demand factors could “ratchet up inflation pressures significantly” in the period ahead. He said policymakers should act pre-emptively rather than wait for more definitive evidence.

Ram Singh said inflation had spread beyond the direct effects of fuel, energy and commodity prices, with firms increasingly passing higher costs on to consumers. However, he cautioned against signalling an extended tightening cycle, arguing that the economy showed few classic signs of overheating and that significant rate hikes could hurt consumption and investment. He favoured incremental increases rather than keeping rates high for an extended period.

RBI Deputy Governor Poonam Gupta said a larger pass-through of input costs to output prices could make a further rate increase necessary to keep inflation low and expectations anchored.

“At some point, a larger pass-through of input costs to output prices may materialize. Under these circumstances, a further increase in the policy rate might be needed to keep inflation low and inflationary expectations anchored,” Gupta said. She added that the pace and extent of any further action would depend on incoming inflation data, its diffusion and evidence of second-round effects.

Nagesh Kumar, while voting for the rate increase, opposed the change in stance and said a neutral position remained appropriate. He said inflation was largely supply-driven and showed no signs of generalization, although managing inflation expectations remained important.

The RBI has raised its inflation projection for FY27 by 20 basis points to 5.2%, while increasing its real GDP growth forecast by 40 basis points to 7.1%.

Higher inflation

With headline inflation expected to average almost 5.8% over the next three quarters, the central bank faces the challenge of containing the spread of price pressures without undermining resilient economic growth.

“With inflation set to rise in coming quarters, the key determinant of the rate hike cycle’s duration will be whether price pressures become more broad-based from current levels,” Madhavi Arora, chief economist at Emkay Global Financial Services, said in a note on Wednesday.

“We think incrementally, macro-financial stability amidst tightening global financial conditions and other externalities will become a bigger variable for RBI’s reaction function,” she said.