MPC flags possibility of policy tightening

KOLKATA: India’s monetary policymakers flagged the possibility of policy rate tightening in the third quarter if higher food and fuel prices lead to a second-order impact and translate into a broad-based increase in inflation, the minutes of the Reserve Bank of India’s (RBI) August monetary policy meeting showed.

Risks of a broad-based increase in inflation remain even because, until June, there was no evidence of overheating on prices despite irregular monsoons and fresh conflict escalation in West Asia.

“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,” RBI Governor Sanjay Malhotra said at the meeting held between August 3 and 5, in which the policy rate was kept unchanged at 5.25%.


“Any evidence of these risks materialising may need policy tightening,” he said.

Deputy Governor Poonam Gupta also expressed similar concerns. “Given that the 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,” she said.

The headline inflation measured by Consumer Price Index is projected at 5% for FY27, while the projection for the second quarter is 4.7% and the fourth quarter at 5.5%.

Core inflation, which does not include the impact of food and fuel price movements, is projected at 4.3% for FY27.

Governor Malhotra said that monetary response to a supply-side shock is warranted when there are signs of it, leading to a generalisation of inflation, de-anchoring of inflation expectations or persistent inflation.

The headline inflation rose to 4.4% in June and 4.5% in July after remaining benign and well within the 4% target for 16 months.

Malhotra underscored the signs of a normalisation of inflation from its benign levels seen earlier. He said that the average inflation last year, when the policy rate was brought down to 5.25%, was only 2%, while the headline inflation this year already averaged 3.93%.The core inflation, which does not include the impact of food and fuel price movement, is also projected to average 4.3% in 2026-27. "This may suggest a recalibration of policy rate,” he said.

It may be noted that the committee decided to continue with the neutral stance, keeping the space open for either a hike or cut in policy rate.

“The persistence of high fuel prices is likely to feed into second-round inflation, resulting from pass-throughs of higher input costs to consumer prices. Inflation risks might then become tilted to the upside. In addition, household inflation expectations remain elevated, which can potentially contribute to tertiary pressures,” external MPC member Saugata Bhattacharya said.

The central bank observed that the turbulent global economic environment is likely to have some bearing on domestic economic activity. Conflict in West Asia, volatile oil prices, sticky inflation expectations, and fragile public finances in systemic economies pose significant downside risks to the global outlook.

“The concerns arising from the West Asia conflict and the blockade of the Strait of Hormuz have not receded,” external MPC member Nagesh Kumar said at the meeting.