India’s Cautious Approach to Interest Rates

By Swati Bhat
MUMBAI (Reuters)

India cannot risk another bout of inflation, and the monetary policy committee (MPC) must adopt a cautious approach to lowering interest rates, members of the rate-setting panel said in the minutes of the October meeting.

The MPC, which consists of three Reserve Bank of India (RBI) members and three external members, maintained the repo rate at 6.50% for the tenth consecutive policy meeting while changing the policy stance to 'neutral'.

The panel has three new external members appointed for a four-year term earlier this month.

> "The arduous battle against inflation is far from won, but we are confident of eventual success in bringing CPI inflation durably closer to the target," stated external member Saugata Bhattacharya in the minutes published on Wednesday.

Michael Patra, RBI’s deputy governor, mentioned that while persistent inflationary pressures may lessen with a less restrictive monetary policy stance, "reducing restraint too quickly may negate the progress made on disinflation".

India's retail inflation in September peaked at 5.49%, its highest in nine months, primarily due to rising food prices, according to data released after the MPC meeting. The central bank targets inflation at 4%.

Five out of the six MPC members voted to maintain policy rates, while newly appointed external member Nagesh Kumar favored a 25 basis points rate cut.

Kumar argued, "Given that inflationary expectations have been successfully anchored, and industrial demand in both domestic and export markets is flagging, a rate cut could help revive demand and bolster private investment."

Demand deficits in both local and international markets may be why private investment hasn't gained momentum, despite healthy corporate balance sheets and government reforms, he added.

RBI Governor Shaktikanta Das emphasized that rate cuts could be premature.
"At this stage of the economic cycle, having come so far, we cannot risk another bout of inflation. The best approach now would be to remain flexible and wait for more evidence of inflation aligning durably with the target," he stated.