RBI Governor flags inflation risks; says greater clarity is needed before policy rate recalibration

Reserve Bank of India Governor Sanjay Malhotra has signalled that the central bank is in no hurry to change interest rates, saying greater certainty over the persistence and trajectory of inflation is needed before the Monetary Policy Committee considers recalibrating the policy rate. Minutes of the MPC's August meeting, released on Wednesday, showed policymakers adopting a wait-and-watch approach amid risks from food and fuel prices, an erratic monsoon, supply disruptions and continued geopolitical uncertainty.

The six-member MPC had earlier this month kept the benchmark repo rate unchanged at 5.25 per cent and retained its neutral monetary policy stance. The decision marked another pause after the RBI's previous rate reductions, with policymakers seeking more evidence on how inflation evolves before determining their next move.

Malhotra flags price pressures

Malhotra said monetary policy would have to respond if a supply-side shock began spreading into generalised inflation, caused inflation expectations to become unanchored or resulted in persistent price pressures. While evidence of such effects remained limited, the Governor cautioned that higher food, fuel and other input costs could spill over into prices across the economy. Any indication that these risks were materialising could require monetary policy tightening, he said.

The comments suggest the RBI is keeping its options open rather than committing itself to either another rate cut or an immediate increase. Malhotra said he wanted greater certainty about how long elevated inflation readings would persist, how the forecasts evolve and the level at which inflation eventually settles before considering a change in the policy rate.

Inflation seen peaking in third quarter

The RBI has projected consumer price inflation at 5 per cent for 2026-27, marginally lower than its previous forecast of 5.1 per cent. Quarterly inflation is projected at 4.7 per cent in the second quarter, before rising sharply to 5.9 per cent in the third quarter and moderating to 5.5 per cent in the fourth. Inflation for the first quarter of 2027-28 is projected at 5.3 per cent.

Malhotra said inflation expectations had moved somewhat higher but remained contained. The central bank expects inflation to ease after reaching its projected peak in the third quarter. The RBI's concern is centred on the possibility that what initially appears to be supply-driven inflation could become more widespread. Food prices, fuel costs and other inputs can eventually feed into wages, services and manufactured goods if the pressures persist for long enough.

The continuing conflict in West Asia and its impact on energy markets and global supply chains have added to those uncertainties. Domestic weather conditions have also complicated the outlook, with the southwest monsoon remaining deficient and uneven amid El Niño conditions.

Poonam Gupta backs wait-and-watch approach

Deputy Governor and MPC member Poonam Gupta also supported maintaining the existing policy rate, arguing that waiting would provide greater clarity on both domestic and international developments.

She said additional time would allow weather-related uncertainties to settle and enable policymakers to assess whether supply-side inflation was becoming entrenched.

It would also provide greater clarity on the global economic environment, which continues to be affected by geopolitical tensions and disruptions to trade and supply chains.

The minutes indicate that policymakers are particularly concerned about the second-round effects of price shocks rather than reacting immediately to temporary increases in individual components of inflation.

Growth remains resilient

The caution on inflation comes even as the RBI has become slightly more optimistic about India's economic growth.

The central bank raised its real GDP growth forecast for 2026-27 to 6.7 per cent from 6.6 per cent. Growth is projected at 7 per cent in the first quarter, 6.4 per cent in the second, 6.5 per cent in the third and 6.8 per cent in the fourth.

Malhotra said economic activity had performed better than expected during the first quarter despite global uncertainty.

The relative resilience of growth gives the RBI greater room to concentrate on inflation without an immediate need to provide additional monetary support to the economy.

The MPC's neutral stance also leaves it free to move rates in either direction depending on incoming data.

For borrowers, the latest minutes indicate that an immediate reduction in lending rates has become less certain. At the same time, the RBI has stopped short of signalling that a rate increase is imminent.

The central bank's next move will instead depend heavily on whether the current food and energy shocks fade or begin feeding into broader inflation. For now, the message from the August minutes is one of caution: hold rates steady, watch the data and retain the flexibility to tighten if price pressures become more persistent.