RBI MPC flags widening inflationary pressures; two members oppose hawkish stance

Broadening inflationary pressures and the risk of second-round price increases dominated the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) deliberations in October, with members differing over the need to signal further monetary tightening, according to the minutes released on Wednesday.

The MPC unanimously voted to raise the repo rate by 25 basis points (bps) to 5.5% at its October 5-7 meeting. However, external members Dr Nagesh Kumar and Prof Ram Singh dissented on the decision to shift the policy stance from neutral to calibrated tightening, preferring to retain the neutral stance.

“I do not favour shifting the stance from neutral to tightening mode, as it may signal an extended cycle of rate hikes. This, in turn, can neutralise the benefits of growth-supportive monetary and fiscal policies in the recent past,” Mr. Singh said.

Despite differences over the policy stance, members broadly acknowledged the risks posed by the West Asia conflict, rising oil prices and the spread of inflation beyond food and fuel.

“Inflationary pressures are building up. Headline CPI is projected to touch the upper tolerance band [of 6%] in Q3 and remain significantly above 5% in the next two quarters,” RBI Governor Sanjay Malhotra said.

Inflation broadens

Pointing to the diffusion of price pressures, Mr. Malhotra said the share of commodities in the consumer price index (CPI) basket recording inflation above 4% rose to 37% in August from 20% in March.

Core inflation increased to 4.2% in August from 3.9% in July, while core inflation excluding precious metals rose to 2.9%, supported by a strong monthly momentum of 0.5%.

Underlying inflation, measured by core inflation excluding precious metals, was also expected to rise above the target in the coming months, indicating a normalisation from earlier benign levels, Mr.Malhotra said.

He said the duration and extent of the rate-hiking cycle would depend on growth-inflation developments, the broadening of price pressures, second-round effects of supply shocks and demand conditions.

The calibrated-tightening stance signals that rate cuts are off the table in the near term, with future action limited to a hike or a pause depending on evolving conditions, he added.

External members flag risks

Mr. Kumar cited deficient monsoon rainfall, rising crude oil prices, elevated precious-metal prices and rupee depreciation as risks to the inflation outlook. These factors prompted a 20-bps upward revision in the FY27 headline inflation forecast to 5.2% and a 10-bps increase in the core inflation forecast to 4.4%.

“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,” he said, supporting the rate increase but favouring a neutral stance amid geopolitical and trade-policy uncertainties.

Mr. Singh, meanwhile, warned that inflation had spread beyond the direct effects of higher fuel, energy and commodity prices, with firms passing rising costs on to consumers.

He also pointed to the RBI’s September household survey, in which the three-month median inflation expectation jumped to 9.9%.

With headline inflation expected to average nearly 5.8% over the next three quarters, he argued that incremental rate increases were warranted as the projected inflation trajectory would render the real rate negative.

“The 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,” he said.