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‘The duration and extent of the rate hiking cycle would be contingent on the actual growth and inflation developments and outlook,’ says RBI Governor Sanjay Malhotra.
RBI Governor Sanjay Malhotra. (File Photo)
Rising inflation and signs of price pressures spreading across a wider range of goods prompted the Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC) to unanimously vote for a 25-basis-point hike in the repo rate earlier this month, according to the minutes of the panel’s meeting released on Wednesday.
The RBI raised the benchmark policy rate to 5.50% on October 7, marking its first rate hike in nearly four years, as policymakers flagged mounting inflation risks amid elevated crude oil and food prices, currency depreciation and resilient domestic demand.
Alongside the rate increase, the MPC shifted its monetary policy stance to calibrated tightening, signalling that the scope for near-term rate cuts had narrowed significantly.
RBI Governor Sanjay Malhotra said the change in stance essentially indicated that rate cuts were off the table in the near term, with future policy decisions likely to involve either a rate hike or a pause, depending on evolving economic conditions.
“…essentially signalling 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, according to the minutes.
Broadening inflation pressures concern RBI
Malhotra highlighted the increasing spread of inflation across the consumer price index (CPI) basket, noting that 37% of commodities recorded inflation above 4% in August, compared with just 20% in March.
The governor said the duration and extent of the rate-hiking cycle would depend on actual growth and inflation developments, particularly underlying inflation, the broadening of price pressures, second-round effects of supply shocks and the impact of demand.
“The duration and extent of the rate hiking cycle would be contingent on the actual growth and 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,” he said.
The MPC’s decision came against the backdrop of a sharp increase in retail inflation. Consumer price index-based inflation accelerated to 5.54% in September, driven by higher onion and other food prices, bringing it close to the upper end of the RBI’s tolerance band.
The government has mandated the central bank to maintain inflation at 4%, with a tolerance band of 2% on either side.
Poonam Gupta favours pre-emptive action
RBI Deputy Governor Poonam Gupta, who oversees monetary policy, said inflation was being driven largely by external supply-side shocks, with limited evidence so far of the pressures becoming entrenched or significantly influencing inflation expectations.
However, she argued that the central bank should act before inflationary pressures became more persistent, particularly given resilient economic growth.
“This has helped retain the credibility of the framework and has kept inflation expectations aligned to the target. Thus, rather than waiting any longer, in view of rising inflation and resilient growth, I favour raising the policy repo rate by 25 bps in this policy,” Gupta said.
She noted that the RBI had taken appropriate policy action whenever inflation reached or breached the lower or upper tolerance limits during the post-pandemic inflation-targeting period, helping preserve the credibility of the monetary policy framework.
Crude oil, food prices and demand add to risks
RBI Executive Director and MPC member Indranil Bhattacharyya said inflation warranted closer attention as supply-side pressures from crude oil and food prices were unlikely to ease quickly.
He also pointed to strong demand and robust growth in monetary and credit aggregates, warning that the combination of supply and demand factors could intensify inflationary pressures in the coming months.
“Therefore, 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,” Bhattacharyya said.
External MPC member Nagesh Kumar also flagged a challenging inflation outlook, citing the deficient monsoon, rising crude oil prices, elevated precious metal prices and currency depreciation. These factors had prompted a 20-basis-point upward revision in the RBI’s headline inflation forecast for 2026-27, according to the minutes.
Kumar acknowledged that inflation was largely supply-driven and that there were no clear signs of economic overheating or a broad-based spread of price pressures. However, he stressed the need to manage inflation expectations.
Another external member, Saugata Bhattacharya, said emerging data increasingly suggested that price pressures were becoming entrenched. Wholesale price indices were recording input-price inflation close to 9% year-on-year, he noted.
While underlying inflation had remained relatively subdued, he said trends in CPI components indicated that any remaining slack in the economy could be narrowing.
“…trends in CPI inflation components indicate that a presumed slack relative to the potential output – if a slack at all even exists at present – appears to be closing,” Bhattacharya said.
MPC members divided on policy stance
External MPC member Ram Singh supported the rate increase, arguing that a calibrated hike was necessary to bring inflation back towards the target from a real interest rate perspective.
“The duration and magnitude of the rate hike required to meet these objectives would depend on the emerging growth-inflation outlook. The MPC will have to remain vigilant about the pace of inflation generalisation to respond in a timely and effective way,” Singh said.
Although all six members voted in favour of the 25-basis-point repo rate hike, the committee was divided on the policy stance. Kumar and Singh favoured retaining the neutral stance, while the MPC ultimately decided to move to calibrated tightening.
The MPC comprises three RBI representatives and three external members appointed by the government. The external members are Nagesh Kumar, director and chief executive of the Institute for Studies in Industrial Development; economist Saugata Bhattacharya; and Ram Singh, director of the Delhi School of Economics.
Growth remains resilient amid global uncertainty
Despite concerns over inflation, the MPC noted that India’s economic momentum remained broad-based and the domestic economy was expected to remain resilient.
However, policymakers acknowledged that geopolitical developments continued to pose challenges to the global economic outlook, particularly through their implications for energy prices and supply chains.
The unanimous rate hike and shift to calibrated tightening indicate the RBI’s growing emphasis on containing inflation risks before they become more widespread. Going forward, the trajectory of monetary policy will depend on how quickly price pressures broaden, whether underlying inflation strengthens and how the balance between economic growth and inflation evolves.
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Ask News18All six MPC members unanimously voted for a 25-basis-point repo rate hike due to rising inflation, signs of price pressures spreading across a wider range of goods, elevated crude oil and food prices, currency depreciation, and resilient domestic demand.
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