India could be gearing up for more interest rate hikes as the Reserve Bank of India-led monetary policy committee (MPC) expressed concerns about inflationary pressures being more broad-based amid rising oil prices, US-Iran war and potential El Nino impact.

While a prolonged rate-hike cycle could be a possibility to curb inflation, the rate-setting panel did not indicate an aggressive tightening policy, minutes of the 5-7 October MPC meet showed.

“The duration and extent of the rate hiking cycle would be contingent on the actual growth-inflation developments and outlook, especially that of underlying inflation, the broadening of price pressures, second round effects of the supply shock and the impact of demand impulses,” RBI Governor Sanjay Malhotra said.

The MPC unanimously raised the repo rate by 25 ‌basis points to 5.50% earlier this month, its first hike in nearly four years. It also shifted its stance to "calibrated tightening" from "neutral".

Malhotra said the shift essentially signalled that “rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving circumstances and the outlook”.

India’s retail inflation neared the RBI’s target ceiling of 6%, rising to a higher-than-expected 5.54% in September. The inflation figures of September were released after the RBI’s repo rate hike in early October, demonstrating a case for further hikes.

With projections indicating the likelihood of headline inflation hitting the upper tolerance limit of 6%, MPC member and RBI Deputy Governor Poonam Gupta said “one may not want to wait for more definitive evidence of generalisation, and instead be mindful of the fact that monetary policy works with a lag”.

"It ​is conceivable that a further increase in the policy rate might be needed to keep inflation low and inflationary expectations ​anchored. The pace, extent and duration of such actions would depend on the incoming data on inflation, its diffusion, and evidence of second-round effects," she said.

The RBI in its October bi-monthly policy raised the average inflation forecast to 5.2% for FY27 from 5% and increased its GDP ‌growth forecast by 40 bps to 7.1%.

According to MPC member Saugata Bhattacharya, data increasingly suggest that price pressures are becoming entrenched in the economy. Input prices, recorded in Wholesale Price Indices (WPI), have been printing close to 9% year-on-year.

"The totality of information indicates a strong economic case at this time for tightening monetary policy," MPC member Saugata Bhattacharya said in the minutes. "At the same time, too rapid a policy rate adjustment risks constricting growth," he added.

Views divided on depth of rate hike

The rate panel members are divided over the extent of monetary tightening that may ultimately be needed.

MPC member and RBI executive director Indranil Bhattacharyya pointed out that the inflation outlook merits greater attention, given supply-side pressures from crude and food prices are unlikely to relent quickly.

He preferred the monetary policy stance to be changed. "I feel it is better to set aside the 'cautiousness bias' and act in a pre-emptive manner at this juncture ​rather than wait and watch," he said in the minutes.

However, two members, Nagesh Kumar and Ram Singh, were of the view that the stance be retained at neutral.

Singh said the shift may signal an extended cycle of rate hikes, which is not merited at the moment. He pointed out that expectations of aggressive tightening can undermine demand even beyond rate-sensitive sectors.

"For now, there is a case for incremental, mild repo rate hikes, not high-for-long rates," Singh said in the minutes, 

Kumar said the inflationary outlook remains challenging due to a combination of factors, including the deficient monsoon, rising crude oil prices, precious metals prices remaining at elevated levels, and exchange rate depreciation, leading to a revision of the forecast for headline inflation for 2026-27 by 20 basis points.

"While inflation is driven largely by supply-side factors and does not show any signs of overheating of the economy nor of generalisation, it is important to manage inflationary expectations…In view of the continued geopolitical and trade policy uncertainties, I feel that a neutral stance remains appropriate.," he said.