India’s central bank wrong-footed investors by opening the door to interest-rate increases, in a striking shift that sent bond yields higher and raised fresh questions about how it communicates with the market.
Minutes of the Reserve Bank’s August meeting released on Wednesday showed a growing inclination toward tighter policy as members become increasingly wary of inflation risks.
Deputy Governor Poonam Gupta raised the possibility of a rate hike later this year, while an executive director stopped just short of doing so. External members Ram Singh and Saugata Bhattacharya also flagged the potential need for policy recalibration or swift adjustments.
The messaging was read as hawkish by markets and comes after RBI chief Sanjay Malhotra said a little over two weeks ago that Indian inflation remains manageable, reinforcing expectations that borrowing costs will stay on hold. The central bank unanimously kept the repurchase rate at 5.25% this month and retained its neutral stance.
On Thursday, bonds fell as traders reassessed the rate outlook, with the yield on the benchmark 10-year government bond rising as much as 4 basis points to 6.86%. Five-year yields climbed as much as 8 basis points to 6.53%.
Goldman Sachs Group Inc.’s Santanu Sengupta expects quarter-point hikes in December and February, while Nomura Holdings Inc.’s Sonal Varma said the discussion challenged her expectation for an extended pause.
Ashika Institutional Equities said it now views the December meeting as “live,” suggesting the RBI could deliver its first hike in almost four years.
The more hawkish signal comes on the heels of the central bank’s sudden decision to end a special incentive for attracting foreign-currency deposits a month ahead of schedule. That move also caught bankers, economists and traders off guard, adding to scrutiny over how the central bank interacts with markets.
In an interview with the Financial Express published Thursday, Malhotra defended the RBI’s approach, describing the early closure as a calibrated and data-driven response to rapidly evolving conditions. He said the central bank needed to remain flexible as circumstances changed.
Still, some see a gap between the RBI’s message and its actions.
SBI Group Chief Economic Adviser Soumya Kanti Ghosh said the central bank’s communication showed a “clear disconnect” between its statements and subsequent moves.
Contrasting messages from minutes and press conferences, alongside measures including variable-rate reverse repo operations and the FCNR(B) window, suggest that “ultimately RBI actions are louder than words,” he said in a note to clients. The RBI’s next policy meeting is scheduled for Oct. 5-7.
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