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Informist, Wednesday, Oct. 21, 2026

 

MUMBAI – The Reserve Bank of India's shift to a calibrated tightening stance should not be interpreted as a signal of large or consistent interest rate hikes, with the pace and extent of monetary tightening depending on the evolution of inflationary pressures and economic growth, the minutes of the Monetary Policy Committee's October meeting showed.

 

MPC external member Ram Singh cautioned that a change in stance could signal an extended rate-hiking cycle, potentially undermining the benefits of growth-supportive monetary and fiscal policies. He favoured incremental, mild increases in the repo rate rather than keeping interest rates high for an extended period, arguing that significant hikes could hurt consumption, investment and corporate capital expenditure.

 

The minutes, released on Wednesday, showed differences among members over the need to change the policy stance, even as all six members unanimously voted to raise the repo rate by 25 basis points to 5.50% at the October 5-7 meeting. The MPC shifted its stance from neutral to calibrated tightening, signalling that rate cuts were off the table in the near term and that future policy action could involve either a rate hike or a pause, depending on evolving conditions.

 

Two external members, Nagesh Kumar and Ram Singh, favoured retaining the neutral stance. Both voted for the 25-basis-point rate increase but disagreed with the shift in stance.

 

The minutes also highlighted the challenge of responding to inflation largely driven by supply-side factors, as monetary policy works with a lag and cannot directly address the initial shock from higher food, fuel and commodity prices. The MPC had noted that while there was some evidence of rising inflation expectations and broadening price pressures, evidence that supply-side pressures were becoming embedded in firms' pricing behaviour remained limited.

 

Singh said inflationary pressures had hardened since the previous policy meeting, as firms passed higher input costs on to consumers. At the prevailing repo rate, the projected inflation trajectory could also turn the real policy rate negative, potentially distorting household saving and consumption decisions, he said. 

 

Singh said calibrated repo rate increases were necessary to realign inflation toward the target, but the magnitude and duration of any hiking cycle should depend on the emerging growth-inflation outlook. He cautioned that a shift from neutral to tightening could be interpreted as signalling an extended rate-hike cycle. Such expectations could weaken demand in interest-rate-sensitive sectors, including vehicles, real estate and discretionary spending, while also weighing on private investment. Significant rate increases could hurt profit margins and undermine the sustainability of capital expenditure plans of both large and small firms, he said.

 

Singh also noted that GDP growth of 7.8% in the quarter ended June was broadly in line with the average growth rate of 7.9% recorded during 2021-22 (Apr-Mar) to 2025-26. He expected growth to moderate in the coming quarters, particularly in real estate and automobiles, as the boost from the cut in goods and services tax rates faded.

 

MPC external member Saugata Bhattacharya supported the rate hike and the shift in stance to calibrated tightening, citing evidence that inflationary pressures were becoming more entrenched and that the economy remained resilient enough to absorb tighter monetary policy. He said credit growth, previously concentrated largely in retail lending and, to some extent, micro, small and medium enterprises, has spread across virtually all sectors and segments.

 

Bhattacharya questioned whether the prevailing monetary policy environment had become too accommodative, given the inflation outlook and current and projected real interest rates. He argued that tightening was warranted to bring inflation closer to target sooner and anchor inflation expectations.

 

However, he stressed that the magnitude and pace of monetary adjustment needed careful calibration because domestic financial conditions have already tightened significantly. Large or rapid policy actions could constrain growth and growth-led capital flows, while insufficient adjustment could allow inflation to persist. He also highlighted vulnerabilities in India's external balance amid tight global financial conditions, saying that maintaining a certain interest-rate differential with G7 economies was important to attract debt capital flows. 

 

Nagesh Kumar said India's economic resilience remained impressive despite the West Asian conflict and continuing uncertainty over global trade policies. He said the increase in investment, expansion in industrial credit and sustained double-digit growth in the capital goods sector suggested that the private investment cycle could be gaining momentum.

 

Kumar also said the RBI's foreign currency non-resident(bank) deposit scheme had attracted substantial non-resident Indian deposits, helping stabilise the rupee and potentially contributing to a significant balance of payments surplus in FY27. The India-EU free trade agreement, expected to come into force at the beginning of 2027, could further support exports, particularly labour-intensive goods, he said.

 

Kumar supported the 25-basis-point rate increase to manage inflation expectations but argued that the neutral stance remained appropriate amid continuing geopolitical and trade-policy uncertainty. Kumar said inflation was largely supply-driven and had not yet shown clear signs of economic overheating or widespread generalisation. 

 

RBI member Indranil Bhattacharyya supported the rate hike and the stance change, arguing that the RBI needed to act preemptively to prevent inflationary pressures from becoming more persistent. With supply-side pressures from crude oil and food prices unlikely to ease quickly, and demand remaining resilient amid strong growth in monetary and credit aggregates, Bhattacharyya warned that inflation could accelerate further. 

 

Bhattacharyya said a neutral stance allowed for rate cuts, increases, or a pause, while calibrated tightening made it clear that rate cuts were no longer an option in the near term. The stance change would also reaffirm the RBI's commitment to price stability, he said.

 

RBI Deputy Governor Poonam Gupta said the economy performed exceptionally well, with GDP growth of 7.8% in Apr-Jun exceeding the August policy forecast. High-frequency indicators suggested the momentum continued into the September quarter, she said.

 

Gupta said external supply-side shocks were driving inflation, with limited evidence that it was becoming entrenched or significantly affecting inflation expectations. Nevertheless, with the forecast showing headline inflation touching the upper tolerance limit of 6% in Oct-Dec, she said the RBI could not wait for definitive evidence of generalisation before acting.

 

Monetary policy works with a lag, and previous episodes in which inflation reached or breached the tolerance limits had prompted policy action that helped preserve the credibility of India's inflation-targeting framework, she said. Any further rate increase would depend on incoming inflation data, the diffusion of price pressures and evidence of second-round effects, she said. 

 

RBI Governor Sanjay Malhotra said inflationary pressures were building even as the economy remained resilient amid a turbulent global backdrop. Malhotra highlighted evidence that price pressures were broadening. Around 37% of items in the consumer price index basket recorded inflation above 4% in August, up from 20% in March, he said.

 

He said underlying inflation, measured by core inflation excluding precious metals, was also expected to move above target in the coming months. Malhotra noted that monetary policy primarily works by curbing second-round effects of supply shocks, including changes in inflation expectations and firms' pricing behaviour. However, it was difficult to distinguish these effects from the indirect impact of higher energy and other input costs on production.

 

He also flagged risks of demand-side inflationary pressures given strong growth in monetary and credit aggregates. The governor said the duration and extent of the rate-hiking cycle would depend on actual growth-inflation developments, particularly underlying inflation, the broadening of price pressures, second-round effects of supply shocks and the impact of demand impulses.

 

The minutes underscored the central bank's challenge: preventing a temporary supply shock from turning into persistent inflation without unnecessarily constraining a still-resilient economy. While the shift to calibrated tightening removes the prospect of near-term rate cuts, the MPC's assessment makes clear that the timing and scale of any further increases will depend on how inflation and growth evolve.  End

 

Reported by Kabir Sharma

Edited by Saji George Titus

 

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