RBI flags widening inflation risks, puts rate cuts on ice

Mumbai: During a recent monetary policy review, the Reserve Bank of India (RBI) members expressed concerns about rising price pressures and the risk of inflation generalization, leading them to vote for a 25 basis point increase in the benchmark repo rate to 5.50%. RBI Governor Sanjay Malhotra noted that 37% of commodities in the consumer basket had inflation above 4% in August, up from just 20% in March.

Core inflation, which excludes precious metals, increased from 3.9% in July to 4.2% in August, driven by a 0.5% momentum. Malhotra also predicted that underlying inflation, measured by core excluding precious metals, would exceed target in future months, indicating a shift from benign inflation levels.

Deputy Governor Poonam Gupta attributed inflation at the time primarily to external supply-side shocks, with limited signs of it becoming entrenched. However, she warned that with projections suggesting headline inflation could reach the upper tolerance limit of 6%, monetary policy's lag should prompt cautious attention. She backed a change in stance, emphasizing that domestic factors like weather adversities and global oil and commodity prices may continue to exert upward pressure on headline inflation, potentially necessitating further rate hikes to keep inflation low and expectations anchored.

External members Nagesh Kumar and Ram Singh disagreed with a change in stance, citing the lack of inflation overheating signs and geopolitical uncertainties as reasons to maintain a neutral stance. Ram Singh argued that current inflation is mainly due to supply-side factors, such as rising fuel, food, and commodity prices, without evidence of economic overheating like wage-price spirals.

MPC member Saugata Bhattacharya expressed concerns about India's external balance, urging a cautious approach to prevent growth stagnation while acknowledging increasing evidence of input cost pressures passing through. RBI executive director and MPC member Indranil Bhattacharyya emphasized the need to set aside caution and hike rates due to strong economic indicators and growing supply-demand pressures.