After hiking the repo rate by another 25 basis points (bps) to 5.50% on Wednesday, the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) has sent a hawkish message: the era of easy money is far from over, and borrowers should brace themselves for more pain. The MPC’s decision to shift its stance from ‘neutral’ to ‘calibrated tightening’ is not a mere change in terminology — it is a clear warning that the central bank is prepared to tighten the screws if inflationary pressures refuse to ease.“It (MPC) underscored that given the current conditions, 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 conditions and the outlook,” RBI Governor Sanjay Malhotra said after the MPC meeting.With borrowing costs already elevated, another rate hike would pile additional pressure on households, businesses and an economy struggling to sustain momentum.The central bank’s message leaves little room for complacency. By signalling further tightening, the RBI has effectively chosen to prioritise inflation control over the immediate concerns of growth and credit demand. The outcome could be particularly punishing for consumers and businesses carrying existing debt, as higher interest rates translate into steeper EMIs, costlier working capital and weaker investment. If the MPC follows through on its hawkish stance, the next round of tightening could expose just how much economic pain the RBI is willing to tolerate to bring inflation under control.Malhotra said the duration and extent of the rate hike cycle would be contingent on the actual growth-inflation developments and outlook, especially that of underlying inflation, the extent of broadening of price pressures and second round effects of the supply shock, as also the impact of demand impulses. The MPC observation clearly indicates that another rate hike might be in the offing in the December policy review, depending on the economic conditions, analysts said in initial reactions.Recalibrating policy rate, supply side inflationHe further observed that in the light of available data, it is clear that inflation and its outlook are not benign as they were last year, with headline CPI inflation expected to average almost 5.8% in the next three quarters and core inflation projected at 4.4 per cent this financial year. “In this milieu, recalibrating the policy rate is imperative,” Malhotra said.As regards supply side inflation, the MPC noted that monetary policy primarily acts by curtailing second round effects (inflation expectations and firm level pricing behaviour, etc.), which take time to manifest and are difficult to extract from available data. “Apart from data related to inflation expectations and firm level pricing behaviour, indicators of generalisation of inflation like core inflation and diffusion indices are used for this purpose,” he said.Story continues below this adAccording to him, it is difficult to distinguish between the second-round effects and the indirect impact of supply side pressures (in production cost through energy and other inputs) as both are present in these indicators. “While there is some evidence of elevated inflation expectations and generalisation of inflation, there are limited signs of supply side pressures getting embedded in pricing behaviour. Similarly, while there is limited evidence of demand side pressures, risks in view of strong growth in monetary and credit aggregates exist,” he said.Considering all these factors, the MPC unanimously voted to increase the policy repo rate by 25 basis points to 5.50%, he said.Global uncertainty, supply chain disruptionsLooking ahead, global economic uncertainty and supply chain disruptions are expected to have some bearing on domestic economic activity, he said. “Furthermore, weak southwest monsoon along with strong El Niño conditions may impact the upcoming rabi season and rural demand,” he said.The near-term outlook on inflation points towards continued pressures from the supply side, on account of the deficient Southwest monsoon, El Niño conditions and high volatility in international oil prices. Price pressures are increasingly becoming visible across a range of commodities within the food component, apart from oil, he said.Story continues below this adIn addition, early signs of inflation becoming generalised are also evident from the increase in core inflation and higher inflation across a larger segment of the CPI basket. “Further tightening of global financial conditions, uncertainty about fair valuation of AI stocks, and an elusive resolution of the West Asia conflict pose significant downside risks to the global economic outlook,” Malhotra said.