India's central bank raises rate to 5.50% amid split over tightening path
Key Facts
Minutes of the Reserve Bank of India's October monetary policy committee meeting showed agreement on raising the benchmark interest rate but divisions over the tightening path and its risks to growth. The committee unanimously raised the repo rate by 25 basis points to 5.50%, according to Reuters' account of the meeting. But support for the rate increase did not extend to shifting the monetary policy stance to calibrated tightening, which Nagesh Kumar and Ram Singh opposed. Both members backed the rate increase, while their objections focused on the stance guiding monetary policy, leaving members divided over the subsequent path despite agreeing on the decision itself. Governor Sanjay Malhotra warned of growing signs of "inflation broadening" across the economy, pointing to concerns beyond price increases in individual commodities. By contrast, committee member Saugata Bhattacharya said in the minutes that "adjusting interest rates too quickly risks constraining growth." The October discussions thus left the door open to further increases, with disagreement persisting over the extent of tightening and its appropriate pace.
The committee's deliberations coincided with upward revisions to forecasts for economic activity and prices for the 2026-2027 fiscal year, according to the central bank's minutes. The Reserve Bank of India raised its economic growth forecast to 7.1% from its previous estimate of 6.7% for the same fiscal year. At the same time, it revised its inflation forecast to 5.2% from 5.0% in the previous policy review, with the October projections combining stronger growth and higher price pressures. Consumer inflation accelerated to 5.54% in September, exceeding expectations, according to Reuters. That reading preceded the October discussions, which revealed the governor's concern over broadening inflationary pressures and some members' reservations about the pace of the interest rate response. The warning about constraining growth came despite the higher forecast for economic expansion, placing the risks of tightening alongside those of persistent inflation at the heart of the committee's debate.
Among the factors fuelling price pressures, Reuters reported that a weak monsoon season contributed to higher food prices and mounting inflation concerns. This coincided with rising oil prices linked to the Middle East war, combining the impact of domestic conditions on food with that of regional developments on energy. Food and oil thus formed the backdrop to monetary policy discussions about how widely inflation was spreading through the economy, alongside the trade-off between curbing prices and preserving growth. Also in the economic backdrop, India's merchandise trade deficit widened to $30.21 billion in September, according to data reported by Reuters. The report compared that level with a deficit of $26.86 billion in August, showing a widening trade gap between the two months. These figures cover merchandise trade in September and August, while the September data were released on October 15, ahead of the monetary policy committee's next meeting.
On the outlook for prices, the official October projections put inflation at 6.0% in the third quarter of the 2026-2027 fiscal year, according to the Reserve Bank of India's monetary policy decision. The bank then expects it to ease to 5.7% in the fourth quarter of the same fiscal year, after reaching the higher level projected for the preceding quarter. This path combines an initial expected rise in inflation with a subsequent easing, alongside the committee's debate over the extent and pace of tightening. The next meeting will follow the unanimously approved October decision, while members remained divided over the policy stance and the risks that rapid rate increases pose to economic activity. The central bank scheduled the next monetary policy committee meeting for December 2 to 4, 2026.