RBI's October Monetary Policy Meeting Reveals Hawkish Tone Amid Inflation Concerns

The RBI’s October monetary policy had a distinctively hawkish tone. The MPC had noted that inflation and its outlook were not benign. There were signs of price pressures becoming generalised and symptoms of elevated inflation expectations. Accordingly, the committee had voted to raise interest rates and change the policy stance to calibrated tightening. But while the decision to raise interest rates was unanimous, two members voted against the change in policy stance, preferring to retain a neutral posture. The recently released minutes of the meeting shed light on the differences of opinion among the committee members. One issue is whether inflation is getting generalised in the economy. This could have a bearing on the extent of policy tightening. MPC member Nagesh Kumar, for instance, argued that “inflation is driven largely by supply-side factors and does not show any signs of overheating of the economy nor of generalisation”. In contrast, there are fears that price pressures will spread further through the economy and, in turn, feed into higher inflation expectations. Committee member Saugata Bhattacharya cautioned that “data increasingly suggests that price pressures are getting entrenched into the economic system”. RBI Governor Sanjay Malhotra seemed to concur with this view, saying that “there are increasing signs of generalisation of inflation as 37 per cent of the commodities in the CPI basket had inflation above 4 per cent in August — it was merely 20 per cent in March”. The central bank’s household inflation expectation surveys also show that the three-month ahead inflation expectations have jumped 70 basis points to 9.9 per cent. Price pressures are likely to intensify. Global food prices, which were relatively soft compared to energy and metals, are now hardening. This could gather further momentum with El Niño strengthening and possibly impacting rabi crops in India. Energy prices are also elevated — Brent crude oil is trading at around $115 per barrel. So far, the central bank has noted that there “are only limited signs of supply-side pressures getting embedded in pricing behaviour”. Going forward, the extent of policy tightening will depend on how committee members assess supply-side pressures across the economy, whether second-round effects take hold, and how growth-inflation dynamics evolve.