The Reserve Bank of India’s Monetary Policy Committee members are closely monitoring the risk of inflation becoming generalised and the significant uncertainties impacting both inflation and economic growth, particularly due to the West Asia conflict, as revealed in the recently released minutes.
Photograph: Francis Mascarenhas/Reuters
Key Points
- Most MPC members are wary of inflation becoming generalised and emphasised the need for close monitoring.
- Uncertainty surrounding inflation and growth prospects is heightened due to the West Asia conflict and supply chain disruptions.
- The MPC unanimously decided to keep the policy repo rate unchanged at 5.25 per cent, maintaining a neutral stance.
- Deputy Governor Poonam Gupta suggested waiting for global and weather-related uncertainties to play out before considering policy cycle reversal.
- External members highlighted the need to monitor the pass-through of WPI inflation to CPI and the impact of deficient rainfall on agricultural output.
Most members of the Monetary Policy Committee (MPC) flagged the need for close monitoring of inflation becoming generalised while highlighting uncertainty surrounding both inflation and growth prospects due to the West Asia conflict.
The rate-setting panel, which met in early June to review monetary policy, unanimously decided to keep the policy repo rate unchanged at 5.25 per cent while maintaining a neutral stance.
Concerns Over Inflation Generalisation
“We should remain watchful and wary about the generalisation of inflation in the coming months,” Sanjay Malhotra, Governor, Reserve Bank of India, said in the minutes of the policy, released on Friday.
He said there is high uncertainty in the assumptions underlying projections of both inflation and growth for several reasons, including the duration of the conflict and disruptions to supply chains.
“Even though it is the inflation outlook which is more relevant for monetary policy, current inflation merits attention, especially when the outlook is clouded,” he said, adding that core inflation remained contained, suggesting that underlying inflationary pressures were subdued.
Policy Stance and Future Outlook
Deputy Governor Poonam Gupta highlighted the need to wait for global as well as weather-related uncertainties to play out over the coming months before taking a call on whether and when to reverse the policy cycle.
She said there is no case for policy tightening at the current juncture, with growth projected to decelerate and inflation yet to become entrenched.
“If anything, it could make the economic pain of the ongoing supply shock sharper,” she said.
Another internal member, Indranil Bhattacharyya, also pointed to prevailing uncertainties.
“Inflation projections are subject to several uncertainties in the present context.
“While WPI inflation has spiked, one needs to wait for its pass-through to CPI inflation,” Bhattacharyya said.
External Members’ Perspectives
According to external member Ram Singh, incoming data will indicate the extent of the second-round impact of higher input costs on consumer price inflation.
“There is no risk of inflation expectations getting unanchored…My long-term policy preference remains growth-supportive,” said Singh, whose views are seen as dovish among members.
“If the inflation-related risks resolve favourably — food inflation remaining stable, global oil prices stabilising below $80 per barrel, and the Federal Reserve avoiding hawkish decisions — in my view, the MPC will have the room to continue to be growth-supportive,” Singh added.
According to another external member, Nagesh Kumar, prudence in the highly uncertain current economic environment requires waiting for greater clarity to emerge on the impact before any monetary policy response.
“Even with the lower growth projections, the Indian economy will continue to remain the fastest-growing major economy,” Kumar said.
The RBI has projected real gross domestic product (GDP) growth of 6.6 per cent for FY27, which is 100 basis points lower than the FY26 growth rate of 7.6 per cent, according to the second advance estimates.
Data released after the monetary policy announcement showed the Indian economy is estimated to have grown 7.7 per cent in FY26.
Inflation Risks and Vigilance
On inflation risks, external member Saugata Bhattacharya said deficient rainfall forecasts signal the need for heightened vigilance regarding agricultural output and prices.
“The chances of a policy mistake remain heightened given the two-way risks to the inflation-growth outlook,” Bhattacharya said.
He added that, given the MPC’s forecasts on growth and inflation, and factoring in elevated and rising inflation expectations, there is a need to closely monitor whether second-order input-cost transmission becomes embedded in retail inflation.
“This will depend on the intensity and duration of the energy shock,” he said.
