RBI flags widening inflation risks, puts rate cuts on ice
Benchmarks Nifty22,811.35-77.61FEATURED FUNDS★★★★★UTI Aggressive Hybrid Fund Regular Plan-Growth5Y Return8.7 % Invest NowFEATURED FUNDS★★★★★Motilal Oswal Midcap Fund Direct-Growth5Y Return18.39 % Invest NowEnter search…
RBI's Monetary Policy Committee raised the benchmark repo rate by 25 basis points to address rising inflation concerns. Governor Sanjay Malhotra indicated a generalisation of inflation, with many commodities exceeding 4% inflation. Deputy Governor Poonam Gupta highlighted the influence of external supply-side shocks on inflation projections. External members expressed concerns about the implications of an aggressive rate hike on economic growth.
Listen to this article in summarized format
Loading...×Mumbai: Rising price pressures dominated discussions at the monetary policy review earlier this month, with members repeatedly cautioning against generalised inflation risks, when the panel voted to raise the benchmark repo rate by 25 basis points to 5.50%.In his comments, Reserve Bank of India (RBI) Governor Sanjay Malhotra said that there are increasing signs of generalisation of inflation as 37% of the commodities in the consumer basket had inflation above 4% in August, up from merely 20% in March.
Also Read: India’s economy stays resilient at 7.1%, but rising inflation raises a red flag, says RBI's Sanjay Malhotra
"While core inflation increased from 3.9% in July to 4.2% in August, core inflation, excluding precious metals, increased to 2.9% in August, driven by a strong momentum of 0.5%. Underlying inflation, as measured by core ex precious metals is also anticipated to move above target in the coming months. This indicates a normalisation of inflation from the benign levels seen earlier," Malhotra said.
He also voted to change the stance of the monetary policy committee (MPC) to calibrated tightening from neutral signalling that rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause.
Live Events
In her statement deputy governor Poonam Gupta inflation at this point in time is mostly driven by external supply-side shocks, with insignificant signs of it becoming entrenched or impacting inflation expectations. "Yet, with projections indicating the likelihood of headline inflation hitting the upper tolerance limit of 6%, one may not want to wait for more definitive evidence of generalisation, and instead be mindful of the fact that monetary policy works with a lag," Gupta said.
Pricing it inShe said that domestically weather-related adversities and global oil and commodity prices may continue to put upward pressure on headline inflation requiring a larger pass-through of input costs to output prices. "Under these circumstances, it is conceivable that a further increase in the policy rate might be needed to keep inflation low and inflationary expectations anchored. The pace, extent, and duration of such actions would depend on the incoming data on inflation, its diffusion, and evidence of second-round effects," she said, backing a change in stance.
External members Nagesh Kumar and Ram Singh acknowledged the inflation challenge due to factors like deficient monsoon, rising crude and metals prices but voted against the change in stance.
While Kumar said that inflation does not show any signs of overheating of the economy nor of generalisation and in view of the geopolitical and trade policy uncertainties a neutral stance remains appropriate.
Another external member Ram Singh also opposed the change in stance saying that it may signal an extended cycle of rate hikes. "This, in turn, can neutralise the benefits of growth-supportive monetary and fiscal policies in the recent past. Current inflation is primarily due to supply-side factors, rising fuel, food, and commodity prices, and their effects. The classic signs of economic overheating-such as a wage-price spiral or demand-driven capacity overstretch or abnormal growth in private consumption and capex-are largely absent," Ram Singh said.
Also Read: RBI tightens scrutiny of $1 billion-plus overseas investments amid rupee pressure
MPC member Saugata Bhattacharya expressed concern on India's external balance, given the tight global financial environment. "At the very least, maintaining a certain gap between India and G7 interest rates is important for attracting debt capital flows. At the same time, too rapid a policy rate adjustment risks constricting growth and hence growth-led capital flows...The current and forecast level of real interest rates do not seem consistent with levels required for ensuring price stability. The real natural rate of interest (pertaining to Q4 of FY23-24) estimated this to be 1.4-1.9%," adding that all available information indicates a strong economic case this time for tightening monetary policy, to bring inflation closer to the target.
RBI executive director and MPC member Indranil Bhattacharyya said there is increasing evidence of pass-through of input cost pressures in segments like restaurants and cooked meals.
"Greater pass-through is expected going ahead, especially when demand conditions are strong. Therefore, the inflation outlook merits greater attention, given supply side pressures from crude and food prices are unlikely to relent quickly. With demand holding strong and in the wake of strong growth in monetary and credit aggregates, the interplay of both supply and demand factors could ratchet up inflation pressures significantly in the period ahead," he said in his statement asking for setting aside the "cautiousness bias" and hiking rates.
Add as a Reliable and Trusted News Source Add Now!
(You can now subscribe to our Economic Times WhatsApp channel)
Read More News onInflationMonetary Policy CommitteeBenchmark Repo RateCore InflationRate HikeMPC minutes
(You can now subscribe to our Economic Times WhatsApp channel)
Read More News onInflationMonetary Policy CommitteeBenchmark Repo RateCore InflationRate HikeMPC minutes Prime ExclusivesInvestment IdeasStock Report PlusePaperWealth Edition
The global business of promising more
One company, 2 words. Bond yield and CDS: Will they decide the fate of global markets?
Business of Odd Things: Inside an industry that farms fish that nobody is meant to eat
War's second-order effects are becoming visible in critical sectors
US mid-term elections – Part 2: What does it mean for Trump to lose control of Congress?
Homebuyers wait as NCLT panel picks holes in unfinished Jaypee projects
- 1
- 2
- 3
& personalised newslettersLogin NowUnlimited AccessStarting @ Rs120/monthGet access to exclusive stories, expert opinions &
in-depth stock reportsSubscribe NowET
Unlock Access to All Exclusives with ETPrime FREE TRIAL
15 Days Free: Unlock All ETPrime Exclusives, Market Tools & ePapers
Trial offer expiring in00 : 05 : 00
I'd rather pay ₹2599 nowUh-oh! This is an exclusive story available for selected readers only.
Worry not. You’re just a step away.
Prime Account Detected!
It seems like you're already an ETPrime member with
Login using your ET Prime credentials to enjoy all member benefits
Log out of your current logged-in account and log in again using your ET Prime credentials to enjoy all member benefits.
Unlock ETPrime's Exclusive Stories Today!
Big Price Drop! Flat 40% Off
Student Only OfferAlready a Member? Sign In nowAlready a Member? Sign In nowAlready a Member? Sign In nowOffer Exclusively For You
Save up to Rs. 700/-
ON ET PRIME MEMBERSHIP
Avail OfferOffer Exclusively For You
Get 1 Year Free
With 1 and 2-Year ET prime membership
Avail OfferOffer Exclusively For You
Get 1 Year Free
With 1 and 2-Year ET prime membership
Avail OfferOffer Exclusively For You
Get Flat 40% Off
Then ₹ 1749 for 1 year
Avail OfferOffer Exclusively For You
ET Prime at ₹ 49 for 1 month
Then ₹ 1749 for 1 year
Avail OfferSpecial Offer
Get flat 40% off on ETPrime
Avail OfferAvail OfferClaim NowAlready a Member? Sign In nowNeed Assistance?
Connect with an ETPrime expert for personalized support and guidance
+91 9484700004'; }); } if(listing) { var h3 = "You tried reading " + listArr.length + " locked stories in the past " + threshold + " days.", h4 = "Become an ET Prime member and don't miss out on these exclusive stories."; var html = '' + h3 + '
' + h4 + '
- ' + listing + '
What’s Included with
ETPrime Membership
1Exclusive Insights That Matter
Uncover the truth with our investigative stories
Make strategic moves using the real-world case studies
Read industry-specific stories to identify emerging trends
Spot opportunities with in-depth insights that matter
Trump temper on H-1B visas is forcing Indians to do these things to stay put in US
What Adani’s US indictment means for India Inc’s overseas fundraising
Why veterans like Reliance, L&T are on acquisition spree? Aswath Damodaran has an answer.
Will China’s dollar bond sale in Saudi Arabia trump the US in financial world?
Huawei launches its own OS to compete with Google and Apple. But can it win beyond China?
The problem with lab grown diamonds
Why a falling rupee is a better option for the economy
A list of top 20 momentum stocks that have delivered massive returns in one year
2Invest Wisely With Smart Market Tools & Investment Ideas
Alpha Trade
Get daily trade ideas from SEBI-registered research analysts.
Investment Ideas
Grow your wealth with stock ideas & sectoral trends.
Stock Reports Plus
All-in-one stock research with Stock Score, peer comparison & key signals.
BigBull Portfolio
Get to know where the market bulls are investing to identify the right stocks.
Stock Analyzer
Check the score based on the company's fundamentals, solvency, growth, risk & ownership to decide the right stocks.
Market Mood
Analyze the market sentiments & identify the trend reversal for strategic decisions.
Stock Talk Live at 9 AM Daily
Ask your stock queries & get assured replies by ET appointed, SEBI registered experts.
3Stay informed anytime, anywhere with ET ePaper
ePaper - Print View
Read the PDF version of ET newspaper. Download & access it offline anytime.
ePaper - Digital View
Read your daily newspaper in Digital View & get it delivered to your inbox everyday.
Wealth Edition
Manage your money efficiently with this weekly money management guide.
TOI ePaper
Read the PDF version of TOI newspaper. Download & access it offline anytime.
Deep Explainers
Explore the In-depth explanation of complex topics for everyday life decisions.
Health+ Stories
Get fitter with daily health insights committed to your well-being.
Personal Finance+ Stories
Manage your wealth better with in-depth insights & updates on finance.
5Enjoy Complimentary Subscriptions From Top Brands
Stream new documentaries from all across the world every day.
Stories you might be interested in
Figures reflect the source report and its stated period. This article is for information and is not investment advice.
