RBI MPC minutes indicate further rate hikes amid inflation risks

The Reserve Bank of Indias sixmember Monetary Policy Committee MPC flagged rising inflation and higher input cost pressures which strengthened the case for the repo rate hike according to the minutes of the meetingThe Reserve Bank of India RBI raised the benchmark interest rate by 25 basis points to 550 per cent on October 7 after the threeday MPC meeting its first rate hike in nearly four years with Governor Sanjay Malhotra and the other five MPC members voting for increasing the repo rateRate cuts off the table in near termThe MPC also shifted the monetary stance to calibrated tightening from neutral with the Governor saying that rate cuts are off the table in the near termThe duration and extent of the rate hiking cycle would be contingent on the actual growthinflation 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 during the MPC meetingNevertheless I feel it is appropriate to change the stance to calibrated tightening 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 he addedThe Governor noted that inflationary pressures are however building up with headline CPI is projected to touch the upper tolerance band in Q3 and remain significantly above 5 per cent in the next two quartersAccording to the RBI the CPI inflation for 202627 is projected to be 52 per cent with Q2 at 49 per cent Q3 at 60 per cent and Q4 at 57 per cent Inflation for Q1202728 is projected at 56 per cent with risks being evenly balanced Core inflation is projected at 44 per cent for 202627The RBIs upper tolerance limit of the headline retail inflation or CPI inflation is 6 per centInflation becoming broad basedThere are increasing signs of generalisation of inflation as 37 per cent of the commodities in the CPI basket had inflation above 4 per cent in August ndash it was merely 20 per cent in March While core inflation increased from 39 per cent in July to 42 per cent in August core inflation excluding precious metals increased to 29 per cent in August driven by a strong momentum of 05 per cent he saidUnderlying inflation as measured by core ex precious metals is also anticipated to move above target in the coming months This indicates a normalisation of inflation from the benign levels seen earlier he addedInflation due to external supply shocksRBI Deputy Governor and MPC member Poonam Gupta noted that inflation is mostly driven by external supplyside shocks with limited signs of it becoming entrenched or impacting inflation expectationsYet with projections indicating the likelihood of headline inflation hitting the upper tolerance limit of 6 per cent one may not want to wait for more definitive evidence of generalisation and instead be mindful of the fact that monetary policy works with a lag she saidThe deputy governor pointed out that during the postpandemic inflationtargeting period whenever inflation had reached or breached the lower or upper tolerance limits the RBI has taken appropriate policy actionThis 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 saidRural and urban inflation remain highRBI Executive Director Indranil Bhattacharyya said the supply side pressures from crude and food prices are unlikely to relent quicklyWith demand holding strong and in the wake of strong growth in monetary and credit aggregates the interplay of both supply and demand factors could ratchet up inflation pressures significantly in the period ahead Therefore I feel it is better to set aside the ldquocautiousness biasrdquo and act in a preemptive manner at this juncture rather than wait and watch he saidBhattacharyya pointed out that inflation expectations are significantly higher in both the urban and rural areas with increasing evidence of passthrough of input cost pressures in certain segments such as restaurants and cooked mealsWhile the external MPC members agreed on a rate hike Professor Ram Singh Director Delhi School of Economics while advocating for a calibrated increase in repo rate said he was not in favour of shifting the stance from neutral to tightening mode as it may signal an extended cycle of rate hikes