India rate panel downplays case for pre-emptive rate move in meeting minutes

MUMBAI: India’s rate panel chose to adopt a wait and watch approach in  keeping interest rates on hold earlier this month, to see if higher oil and food prices are likely to lead to more generalised inflation, minutes of the committee’s meeting released on Friday showed.

A sharp rise in oil prices brought on by the Iran war has sent the Indian rupee tumbling and raised fears of a spike in inflation, prompting some in the market to wager on a hike in interest rates.

The panel had, however, voted unanimously to keep the policy repo rate unchanged at 5.25% on June 5, while retaining its monetary policy stance at ‘neutral’.

Headline inflation is within the target band and core inflation is contained, “suggesting that underlying inflation pressures remained subdued”, Reserve Bank of India governor Sanjay Malhotra said in the minutes.

Indian economy, government finances, see mounting costs from Iran war

All the same, “we need to be watchful of the inflation trajectory,” Malhotra said, adding that he prefers a “wait and watch” approach.

Central bank deputy governor Poonam Gupta took a similar view, arguing against a “preemptive policy pivot”.

“We ought to wait a bit more for global as well as weather related uncertainties to play out over the coming months,” Gupta said.

India’s retail inflation stood at just under 4% in May.

For the financial year ending March 2027, the central bank raised its retail inflation forecast to an average of 5.1%, up from 4.6%, with core inflation pegged at 4.7%, from 4.4%. It has assumed an average crude oil price of $95 per barrel.

While the central bank has a medium term inflation target of 4%, the tolerance band for the price gauge is set at 2-6%.

“Flexible inflation targeting is a framework best characterised as constrained discretion, in which monetary policy is anchored to a numerical target but retains the scope to accommodate shocks,” wrote central bank executive director Indranil Bhattacharyya.

“This flexibility is especially important during periods of high uncertainty.”

India’s May trade gap narrows as exports rise; U.S. trade talks in focus

While keeping interest rates unchanged, the RBI announced a number of steps to stem the recent depreciation in the Indian rupee. The currency, which had fallen as much as 6% versus the dollar this year, has since recovered partially by over 1% due to the central bank’s steps and a drop in oil prices.

Brent crude oil futures which had soared to over $100 per barrel at the peak of hostilities between Iran and the U.S. have dropped as the two sides negotiated a peace deal. Brent crude futures are now trading close to $80 per barrel.

Among the three external members on the rate panel, Ram Singh and Nagesh Kumar leaned towards the committee’s wait and watch approach, arguing for the need for greater clarity and to keep an eye on growth.

India’s GDP growth estimated at 7.8% in January-March

GDP growth is expected at 6.6% this fiscal year, below the 6.9% forecast in April.

Panel member Saugata Bhattacharya, however, struck a relatively hawkish note saying the balance of risks had “tilted towards embedding inflationary pressures.”