RBI raises repo rate as inflation spreads, though panel members disagree on future stance

The Reserve Bank of India's Monetary Policy Committee voted to raise the repo rate by 25 basis points to 5.5 percent during its October 5 to 7 meeting, according to minutes released on Wednesday. While the rate hike was unanimous, external members Dr Nagesh Kumar and Prof Ram Singh dissented on the decision to shift the policy stance from neutral to calibrated tightening.

Inflation Concerns

Governor Sanjay Malhotra warned that headline consumer price inflation is projected to touch the upper tolerance band of 6 percent in the third quarter and remain above 5 percent in the next two quarters. The share of commodities in the consumer price index basket with inflation above 4 percent rose to 37 percent in August from 20 percent in March. Core inflation increased to 4.2 percent in August from 3.9 percent in July. Members broadly acknowledged risks from the West Asia conflict, rising oil prices, and the spread of price pressures beyond food and fuel.

Differing Views

Mr Kumar cited deficient monsoon rainfall, rising crude oil prices, elevated precious-metal prices, and rupee depreciation as risks that prompted a 20 basis point upward revision in the FY27 headline inflation forecast to 5.2 percent. Mr Singh noted that inflation has spread as firms pass rising costs to consumers, and pointed to the RBI's September household survey where the three-month median inflation expectation jumped to 9.9 percent.

Context

Central banks adjust the repo rate to manage money supply and keep price rises under control when inflation moves above targeted comfort levels. The Monetary Policy Committee meets regularly to assess economic growth and price stability before deciding on monetary policy adjustments.