Rising inflation and signs of price pressures spreading across a wider range of goods prompted the Reserve Bank of India's six-member Monetary Policy Committee (MPC) to unanimously raise the repo rate by 25 basis points earlier this month, according to the minutes of its meeting released on Wednesday.
The RBI increased the benchmark lending rate to 5.50 per cent on October 7, marking its first rate hike in nearly four years. The committee also decided to shift its monetary policy stance to calibrated tightening, although two members favoured retaining a neutral stance.
RBI Governor Sanjay Malhotra said the change in stance was appropriate given the emerging inflationary risks and the need to preserve price stability.
The shift essentially signalled that rate cuts were unlikely in the near term and future policy decisions would involve either further increases or a pause, depending on economic conditions.
๐๐ฟ๐ผ๐ฎ๐ฑ๐ฒ๐ป๐ถ๐ป๐ด ๐ฝ๐ฟ๐ถ๐ฐ๐ฒ ๐ฝ๐ฟ๐ฒ๐๐๐๐ฟ๐ฒ๐
Malhotra observed that inflation was becoming more widespread, with 37 per cent of commodities in the Consumer Price Index (CPI) basket recording inflation above 4 per cent in August, compared with just 20 per cent in March.
"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 governor stressed that subsequent monetary policy actions would depend on the evolving balance between inflation and economic growth.
Retail inflation rose sharply to 5.54 per cent in September, driven largely by higher onion and other food prices, bringing it closer to the upper limit of the RBI's inflation tolerance band.
The central bank is mandated to maintain inflation at 4 per cent, with a tolerance range of 2 to 6 per cent.
๐ฅ๐๐ ๐บ๐ฒ๐บ๐ฏ๐ฒ๐ฟ๐ ๐ฏ๐ฎ๐ฐ๐ธ ๐ฝ๐ฟ๐ฒ-๐ฒ๐บ๐ฝ๐๐ถ๐๐ฒ ๐ฎ๐ฐ๐๐ถ๐ผ๐ป
RBI Deputy Governor Poonam Gupta said inflation was largely being driven by external supply-side shocks, with limited evidence that price pressures had become entrenched or significantly affected inflation expectations.
However, she argued that the central bank should act promptly rather than wait for inflation to strengthen further.
"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 timely monetary interventions during the post-pandemic period had helped maintain the credibility of India's inflation-targeting framework.
RBI Executive Director Indranil Bhattacharyya also supported the increase, warning that supply-side pressures from crude oil and food prices were unlikely to ease quickly.
He said strong demand, coupled with growth in monetary and credit aggregates, could intensify inflationary pressures.
"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.
๐๐ ๐๐ฒ๐ฟ๐ป๐ฎ๐น ๐บ๐ฒ๐บ๐ฏ๐ฒ๐ฟ๐ ๐ณ๐น๐ฎ๐ด ๐ถ๐ป๐ณ๐น๐ฎ๐๐ถ๐ผ๐ป ๐ฟ๐ถ๐๐ธ๐
All three external MPC members, Nagesh Kumar, Saugata Bhattacharya and Ram Singh, supported the 25-basis-point increase.
Kumar, Director and Chief Executive of the Institute for Studies in Industrial Development, said the inflation outlook remained challenging because of a deficient monsoon, rising crude oil prices, elevated precious metal prices and exchange rate depreciation.
These developments had contributed to a 20-basis-point upward revision in the headline inflation forecast for 2026-27.
While acknowledging that inflation was primarily supply-driven and did not indicate overheating in the economy, Kumar stressed the importance of managing inflation expectations.
Economist Saugata Bhattacharya expressed greater concern over the persistence of price pressures.
He pointed out that input prices reflected in Wholesale Price Indices had been rising at nearly 9 per cent year-on-year, suggesting that inflationary pressures were becoming increasingly entrenched.
Although underlying inflation remained comparatively subdued, trends in CPI components indicated that any remaining slack in the economy might be narrowing, he said.
Ram Singh, Director of the Delhi School of Economics, said a calibrated increase in the repo rate was necessary to bring inflation back towards the target.
He added that the magnitude and duration of future increases would depend on the emerging growth-inflation outlook.
๐ง๐๐ผ ๐บ๐ฒ๐บ๐ฏ๐ฒ๐ฟ๐ ๐ณ๐ฎ๐๐ผ๐๐ฟ ๐ป๐ฒ๐๐๐ฟ๐ฎ๐น ๐๐๐ฎ๐ป๐ฐ๐ฒ
Although the MPC unanimously approved the repo rate increase, differences emerged over the decision to shift the monetary policy stance to calibrated tightening.
External members Nagesh Kumar and Ram Singh preferred retaining the neutral stance, reflecting differing assessments of the need to signal further tightening.
The committee acknowledged that geopolitical developments continued to create uncertainty in the global economic environment.
However, members observed that India's economic fundamentals remained strong, with broad-based growth momentum and resilience supporting the outlook.
The minutes indicate that the RBI will closely monitor underlying inflation, the spread of price pressures and the impact of supply shocks before determining its next monetary policy move.