India rate panel signals impending hikes, eyes inflation path for timing

The Reserve Bank of India's rate setters have indicated a potential for rate hikes, despite leaving interest rates unchanged in their recent policy meeting, as they closely monitor the path of inflation, according to minutes released on Wednesday. A surge in oil prices due to the Middle East war has heightened inflation concerns, leading markets to anticipate a rise in borrowing costs.

India's headline consumer inflation stayed within the central bank's 2-6% tolerance range at 4.45% in July. RBI Governor Sanjay Malhotra stated that while there are no clear signs of generalized inflation, there is a risk of broader-based inflation from higher food, fuel, and input prices. Deputy Governor Poonam Gupta suggested that any future policy easing may not be an option, and a hike may emerge during the fiscal year.

The central bank has kept policy rates unchanged so far this year, contrasting with regional peers who have tightened monetary policy in response to inflationary pressures. The RBI has adjusted its inflation forecast for the current fiscal year from 5.1% to 5%, while raising its growth forecast to 6.7%. RBI members emphasized the need to adjust interest rates if second-round effects of supply-side inflation deepen.

Crude oil prices have recently risen to around $91 per barrel, near their highest in three weeks, making India particularly vulnerable to the Middle East oil shock.