Nomura expects the Reserve Bank of India (RBI) to raise the policy repo rate by another 25 basis points (bps) in December owing to inflation risks, followed by an extended policy pause, although the February meeting remains live. The brokerage said the October MPC minutes suggest that growth-inflation dynamics are the primary drivers of the Monetary Policy Committee's decision-making, with no discussion on currency defence.
"The October meeting minutes suggest the 25bp rate hike was a pre-emptive move to anchor inflation expectations," Nomura said. However, there is a divide, with RBI members more comfortable with further rate hikes than two external MPC members, who are more reticent about the collateral damage from steep tightening.
At its October meeting, the MPC unanimously raised the policy repo rate by 25 bps to 5.50% and changed its policy stance to "calibrated tightening" from "neutral". The minutes were largely in line with signals on policy day, attributing the rate hike to stronger growth and upside inflation risks.
While the minutes focus on growth and inflation, Governor Sanjay Malhotra's recent comments hinting at interest rate defence of the currency have fuelled market expectations of an outsized rate hike in December, Nomura said.
The consensus view seems to be that the pass-through of higher input costs to retail prices was underway. As such, the MPC could no longer wait for further evidence of inflation generalisation, and pre-emptive action was necessary to anchor inflation expectations, as explicitly stated by Deputy Governor Gupta and RBI member Indranil Bhattacharyya.