RBI Turns Cautious on Inflation, Says Future Rate Moves Could Mean Hikes or a Pause

Rising inflation, persistent food and crude oil price pressures, and signs of price increases spreading across the economy prompted the Reserve Bank of India (RBI) to raise its key interest rate for the first time in nearly four years, according to the minutes of the Monetary Policy Committee (MPC) meeting released on Wednesday.

The six-member panel unanimously voted to increase the repo rate by 25 basis points to 5.50% on October 7, signalling that interest rate cuts are unlikely in the near future. RBI Governor Sanjay Malhotra said the central bank had shifted to a stance of “calibrated tightening”, indicating that future policy decisions would depend on whether inflation and economic growth warrant another hike or a pause.

The minutes highlighted the widening nature of inflationary pressures. The share of items in the Consumer Price Index (CPI) basket recording inflation above 4% rose from 20% in March to 37% in August, suggesting that price increases were no longer confined to a limited number of commodities.

Malhotra said the scale and duration of any further rate hikes would depend on underlying inflation, the spread of price pressures, the impact of supply shocks and demand conditions.

RBI Deputy Governor Poonam Gupta argued that rising inflation and resilient economic growth justified acting without further delay. Although she attributed much of the price pressure to external supply shocks, she said the central bank needed to protect the credibility of its inflation-targeting framework.

RBI Executive Director Indranil Bhattacharyya also favoured a pre-emptive response, warning that elevated crude oil and food prices, coupled with strong demand and credit growth, could intensify inflation. External MPC member Saugata Bhattacharya cautioned that price pressures appeared to be becoming entrenched, with wholesale input-price inflation close to 9% year-on-year.

Other members pointed to the deficient monsoon, rising international oil prices, elevated precious-metal prices and rupee depreciation as risks to the inflation outlook. External members Nagesh Kumar and Ram Singh supported the rate increase but preferred retaining a neutral policy stance, unlike the committee's overall decision to adopt calibrated tightening.

The RBI's decision comes as retail inflation climbed to 5.54% in September, driven by higher onion and other food prices. Inflation remains within the central bank's permitted range of 2% to 6%, but is above its 4% target.