Tide is turning within the MPC

The RBI continued frontloading policy tightening in its late-September meeting with another 50bp hike to the repo rate (to 5.90%) but communications since then suggest that some MPC members are ready to ease off the brakes. The minutes to that meeting published last week confirm that Ashima Goyal – the most dovish committee member – voted for a smaller hike as “high uncertainty calls for small steps”. More surprising are comments from Jayanth Varma, who is generally regarded as the most hawkish member of the panel. He went even further than Ms Goyal in suggesting that “a pause is needed after this hike” because “much of the impact of large monetary action is yet to be felt in the real economy”. All of this appears to take two votes for another 50bp hike off the table in the next meeting in December. And by then, we think other MPC members will have seen enough evidence of growth coming off the boil and price pressures peaking. As such, we remain comfortable with our long-held view that the MPC will now revert to hikes of 25bp increments. In all, we think the repo rate will top out at 6.40% early next year.