India's rate setters signalled the possibility of rate hikes ahead even as they left interest rates unchanged at their policy meeting earlier this month, watching for evidence that supply-sparked inflation may be seeping into the broader economy, minutes of the committee's meeting released on Wednesday showed.
A sharp rise in oil prices brought on by the war in the Middle East has stoked inflation worries, prompting markets to price an increase in borrowing costs, while also exerting pressure on the Indian rupee.
The panel had voted unanimously to keep the policy repo rate (INREPO=ECI) unchanged at 5.25% on August 5, while retaining its monetary policy stance at "neutral".
India's headline consumer inflation remained well within the central bank's 2-6% tolerance band at 4.45% in July. The Reserve Bank of India has a 4% medium term target.
While there are limited signs of inflation becoming generalized so far, headline inflation does appear to be normalizing "from its benign levels seen hitherto," RBI chief Sanjay Malhotra said in the minutes.
"We also need to be watchful as the risks of higher food, fuel and other input prices translating into a broad-based increase in inflation and de-anchoring of expectations persist. Any evidence of these risks materialising may need policy tightening," Malhotra said.
Central bank Deputy Governor Poonam Gupta, meanwhile, pointed out scope for any further policy easing does not exist, instead "a case for a rate hike may emerge during the course of the (fiscal) year."
At the current juncture though, due to the persistent uncertainty stemming from global developments and weather risks, "the best course of action would be to wait and watch a bit more," she said in the minutes.
India has kept policy rates unchanged so far this year, setting it apart from regional peers such as Indonesia, the Philippines and others that have responded to the inflationary fallout from higher energy prices and war-driven currency volatility by tightening monetary policy.
At its policy meeting earlier this month, the RBI trimmed its forecast for average inflation in the current financial year to 5% from 5.1%, while nudging up its economic growth forecast to 6.7%.
HAWK'S EYE ON SECOND ROUND INFLATION
Several policymakers on the six-member rate setting panel emphasised that interest rates would need to adjust if the second-round effects of supply side inflation deepen.
"If external shocks worsen or the second-round price effects spread widely, we should be able to swiftly adjust policy to protect macroeconomic stability," Ram Singh, an external member on the panel, said in the minutes.
Crude oil prices have seen a renewed rise this month after retreating in July and last stood at around $91 per barrel, near their highest in three weeks.
India imports nearly 90% of its crude requirements, making it one of the world's most vulnerable economies to the Middle East oil shock.
Another external member, Saugata Bhattacharya, noted that the forecasted normalization of underlying inflation will require close monitoring of the growth-inflation dynamics, for the appropriate time to recalibrate the policy rate.
Both external members also pointed to the need to track the levels of inflation-adjusted interest rates, also known as real rates, which affect savings and investment decisions across the economy.
While flagging upside risks to inflation from inconsistent rainfall and volatility in global energy prices, RBI Executive Director Indranil Bhattacharyya noted he would prefer to wait for risks to manifest in inflation prints before acting on rates.
"A pause preserves flexibility on timing; it does not necessarily imply an extended pause," he wrote in the minutes.
