India rate panel signals impending hikes, eyes inflation path to gauge timing

The Indian rate panel has indicated a potential for future interest rate hikes, according to minutes of their meeting released on Wednesday. The committee is closely monitoring whether inflation, driven by supply factors, is spreading to the broader economy, which could justify increased borrowing costs. A surge in oil prices due to the Iran war has heightened inflation concerns, leading markets to anticipate rate hikes and affecting the Indian rupee.

Although the panel voted unanimously to maintain the policy repo rate at 5.25% on August 5, it retained a neutral monetary policy stance. India's headline consumer inflation remained within the central bank's 2-6% tolerance band at 4.45% in July, with the Reserve Bank of India aiming for a 4% medium-term target. RBI Chief Sanjay Malhotra stated that while there are early signs that inflation is normalizing from its previous low levels, the risks of higher food, fuel, and other input prices could lead to a broader increase in inflation and de-anchoring of expectations.

Any evidence of these risks materializing may necessitate policy tightening. Deputy Governor Poonam Gupta noted that due to persistent uncertainty from global developments and weather risks, there is no room for further easing at the moment. She suggested waiting and watching a bit more. India has kept policy rates unchanged so far this year, distinct from regional peers like Indonesia, the Philippines, which have responded to inflationary pressures by tightening monetary policy.

At its recent meeting, the RBI lowered its forecast for average inflation for the current fiscal year to 5% from 5.1% while raising its economic growth forecast to 6.7%.