RBI MPC minutes: Policy panel signals rate hike risk as inflation rises

“We also need to be watchful as the risks of higher food, fuel and other input prices translating into a broad-based increase in inflation, and de-anchoring of expectations persist. Any evidence of these risks materialising may need policy tightening,” Malhotra said as per the minutes of the meeting.

The MPC kept the repo rate unchanged at 5.25% in the policy review. The panel marginally raised its growth forecast for FY27 to 6.7% from 6.6% and lowered its inflation projection to 5% from 5.1%.

No scope for further easing at current juncture

Malhotra said there are signs of a normalisation of inflation from its benign levels seen hitherto. The average inflation last year, when the policy rate was brought down to 5.25%, was only 2%. “Not only has headline inflation already averaged 3.93% this year, even core excluding precious metals is expected to converge to core inflation in the last quarter of this financial year, with core inflation projected to average 4.3% in 2026-27. This may suggest a recalibration of policy rate,” he said.

“Inflation expectations, while slightly higher, are contained. Moreover, inflation is expected to taper from its peak in Q3. This shock does not therefore call for a monetary response to curtail demand as of now,” the governor said.

According to Poonam Gupta, Deputy Governor, the scope for any further easing does not seem to exist at the current juncture. Instead, given that the headline inflation is projected to peak to a level as high as 5.9% in Q3 2026-27, a case for a hike may emerge during the course of the year. “I believe that with persistent uncertainty on account of global developments and weather-related risks, the best course of action would be to wait and watch a bit more,” Gupta said.

“The shift in the distribution towards higher inflation numbers warrants a careful vigil. One must look out for the extent of generalisation and risk of inflation expectations getting unanchored before contemplating any rate hike,” said Indranil Bhattacharyya, a member of the MPC.

Policy uncertainty, external shocks

MPC Member Ram Singh said high uncertainty still looms over several key monetary policy indicators. “While the economy has withstood the conflict spillovers with limited impact so far, the strains are becoming increasingly visible. We have to closely watch if and how inflation-related risks resolve — El Niño’s effects on food inflation and global oil prices. As of now, it makes sense to retain all the maximum operational flexibility needed to respond to an evolving inflation trajectory,” Singh said.

“If external shocks worsen or the second-round price effects spread widely, we should be able to swiftly adjust policy to protect macroeconomic stability,” he said.

“I judge it appropriate to await evidence of a further pickup in aggregate demand and generalisation of price pressures before taking the next policy action. Another factor which needs to be tracked are the levels of real interest rates,” said MPC Member Saugata Bhattacharya. Despite this caution, the forecast normalisation of underlying inflation from earlier benign levels will require close monitoring of the growth-inflation dynamics, for the appropriate time to recalibrate the policy rate, he said.

“We need to be extremely cautious in such a highly uncertain economic environment and be watchful of the emerging geopolitical, trade policy and monsoon-related trends and their effect on India’s economic outlook,” said MPC Member Nagesh Kumar. At the current juncture, there does not seem to be a case for a monetary policy action. Hence, I vote for the status quo on the repo rate, Kumar said.

As argued in the June meeting, the elevated headline inflation is primarily due to supply side shocks; it is mostly driven by higher food and fuel prices; and there are limited signs of generalisation of inflation with core inflation remaining modest, Malhotra said.