The Reserve Bank of India's Monetary Policy Committee voted unanimously this month to raise the repo rate by 25 basis points to 5.5 per cent, and then divided four to two over the stance that should accompany it.
The split is recorded in the committee's minutes, published by the Reserve Bank and reported by The Times of India, which show the Governor and the central bank's own members taking a more hawkish view than the two external members.
The majority backed a shift from a neutral stance to calibrated tightening. Governor Sanjay Malhotra, deputy governor Poonam Gupta, executive director Indranil Bhattacharyya and external member Saugata Bhattacharya voted for the change.
The two external members who opposed it, Nagesh Kumar and Ram Singh, favoured retaining the neutral stance, citing inflation driven predominantly by supply-side factors and risks to growth.
Malhotra set out what the new stance means in practice. Calibrated tightening signals 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," he said.
The duration and extent of any rate-hiking cycle, the minutes record, would depend on underlying inflation, the spread of price pressures, second-round effects of supply shocks and demand conditions. The shift signals that cuts are off the table as inflation threatens to spread beyond food and fuel.
Kumar, who favoured the 25-basis-point rise but not the change of stance, said: "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." He argued that a neutral stance remained appropriate amid geopolitical and trade policy uncertainties.
Singh warned that shifting to calibrated tightening could signal an extended rate-hiking cycle and undermine the benefits of recent growth-supportive monetary and fiscal policies.
The decision was therefore unanimous on the number and contested on the adjective. The rate moved by common consent; the description of where rates might go next did not.
It is the description that repays study. A committee setting interest rates has three available moves. It can raise them, it can lower them, or it can leave them where they are. Calibrated tightening, on the Governor's own definition, removes one of the three.
That is a considerable gain in precision. Before the meeting, the next decision could have been any of three things. After it, it can only be two. The committee has reduced the uncertainty facing Indian markets by a third without touching a single price.
The neutral stance it abandoned, by contrast, permitted all three moves and therefore distinguished nothing. Two members voted to keep it. On the arithmetic above, they were voting for the least informative position available to them.
Our analysts observe that the method extends neatly. A stance ruling out both cuts and pauses would leave only increases, and the Reserve Bank's guidance would become perfectly accurate in advance. Nothing in the framework forbids such a stance, and it would require no additional data.
The Department of Unnecessary Research has asked the committee to consider the logical end point of its own instrument. A stance that eliminates two of the three options is not guidance. It is the decision, taken early and filed under a different heading.