India's rate panel signals more hikes but shuns an aggressive cycle

what happened

Members of the Reserve Bank of India's rate-setting committee indicated that further rate hikes may be needed to curb inflation, but they stopped short of backing an aggressive tightening cycle over concerns about economic growth, according to minutes released on Wednesday and reported by Reuters.

Earlier this month the central bank unanimously raised its repo rate by 25 basis points to 5.50%, its first increase in almost four years. The committee also shifted its stance to calibrated tightening from neutral, and Governor Sanjay Malhotra said this effectively ruled out rate cuts. Higher oil prices tied to the Middle East war and a weak monsoon have pushed up food prices, and markets now price in a little over 100 basis points of hikes over the next 12 months.

Views differ on how far rates should go. Members Nagesh Kumar and Ram Singh opposed the change in stance, with Singh warning that it could signal a prolonged hiking cycle that the economy does not currently warrant. Economists at Barclays expect two more hikes, Goldman Sachs at least three, and HSBC a larger 50 basis point move in December.

why it matters

For markets, the key signal is that the RBI is leaning toward tightening rather than pausing. That supports the rupee and yields on Indian government bonds, while equities may come under pressure if rates rise faster than expected.

market impact

Indian bonds and rupee: expectations of further hikes lift yields and support the currency

tags

instruments