RBI Minutes Show Rate Panel Open to More Hikes, Divided on Pace

Synopsis

In the minutes released on October 21, the Reserve Bank of India’s Monetary Policy Committee (MPC) unanimously agreed to increase the repo rate by 25 bps to 5.50 per cent for the first time since February 2023. Inflation has spread and members indicated that further increases were required due to oil and inadequate monsoon. They disagreed about the shift in attitude and how to do so without strangling growth.

This month, the RBI's rate-setting panel acted unanimously to hike rates. It held several discussions with the minutes released on October 21 about how far to go.

The minutes of the October 5 to 7 monetary policy meeting of the Monetary Policy Committee (MPC) show a unanimous 6–0 decision to keep the repo rate at 5.50 per cent. It was the first increase in almost four years. The committee also shifted from a neutral to a “calibrated tightening” stance by a vote of 4–2.

The reasons for the committee's actions

The minutes indicate the oil price surge due to the Middle East war and a sluggish monsoon drove food costs higher and added to inflation fears, Reuters said in a report. Governor Sanjay Malhotra remarked that there were indications of increased generalised inflation. Retail inflation has spiked to a higher than expected 5.54 per cent in September, close to the RBI's 6 per cent ceiling and the central bank expects it to average 6 per cent in October-December.

Deputy Governor Poonam Gupta pointed out that there is no need to wait for more solid data on widespread inflation as monetary policy has a lag effect. She said there may be a need to raise it again to maintain inflation expectations.

The minutes show Gupta saying, “Monetary policy operates with a lag,” which was echoed by external member Saugata Bhattacharya, who felt the case for a quick rate-hike was strong.

The panel disagreed on some points

Bhattacharya warned of "restricting growth" if rates are adjusted too rapidly. Nagesh Kumar and Ram Singh were two members who were against the shift of posture. It could be a continuation of price hikes and too much of it now, Singh said, and called for “small and gentle” ones instead of high-for-long rates. He pointed out that the upward expectations are likely to dampen demand in rate-sensitive industries.

Governor Malhotra said the turnaround was because of which rate cuts were no longer being considered. Markets are now expecting just a little more than a 100 bps of increases in future 12 months.

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The RBI allowed growth to increase by 40 basis points to 7.1 per cent and the average rate of inflation to move up to 5.2 per cent for the current financial year. The minutes are not an binding decision, and do not say the committee will hike at their next meeting, which is December 2-4.

Means for borrowers and banks

Generally, the higher interest rates get reflected in floating rate loans tied to the repo rate, but at different rates across lenders. The same applies to the rates of the deposits, which also change, but the rate of the bank that is paid to them is not necessarily the same as the bank's repo rate of 5.50 per cent.

Outlook

The committee will be put to the test at its meeting in December as the rupee nears 95 to the dollar and the cost of Brent is above $116. The minutes indicate that the debate is far from over as evidenced by the split recorded.