Differences have erupted in the RBI’s monetary policy committee (MPC) over rate hikes, making future action by the central bank somewhat uncertain. The minutes of the MPC held on September 28-30 reveal that two of the total six members - Ashima Goyal and Jayanth Varma - were in favour of tapering the rate hike cycle.
Goyal said that “Most analysts are arguing for a 50bps (100bps = 1 percentage point) rise just to preserve a spread with US policy rates. This is a fear-driven over-reaction. If the terminal Fed rate is 5%, will it require we raise ours to 8%?”
According to Goyal, the carry trade (drawing investors by offering better spreads over US rates) is not a stable source of financing. Her colleague in the panel, Varma, also called for a pause. “A pause is needed after this hike because monetary policy acts with lags. It may take 3-4 quarters for the policy rate to be transmitted to the real economy, and the peak effect may take as long as 5-6 quarters,” he said
Many analysts have been expecting the RBI to hike rates in the next policy in December as well in light of the higher inflation numbers and a hawkish statement from the US Federal Reserve. “Going forward, monetary policy needs to remain watchful and nimble, based on incoming data and evolving conditions,” RBI governor Shaktikanta Das wrote.