RBI MPC members hint at rate hike as inflation may rise in coming months

The members of the Reserve Bank of India’s (RBI’s) rate setting panel indicated interest rate hikes sooner than later as headline inflation is likely to rise from its benign levels in the coming months, according to the minutes of the August review of the monetary policy committee (MPC).

The clearest signal probably came from RBI Deputy Governor Poonam Gupta who is also in-charge of the monetary policy department.

“Given that the headline inflation is projected to peak to a level as high as 5.9 per cent in Q3 2026-27 (third quarter of FY27), a case for a hike may emerge during the course of the year,” Gupta said, adding the scope for any further easing does not seem to exist at the current juncture.

The six member MPC decided to maintain the status quo for the fourth consecutive time during the August review.

RBI Governor Sanjay Malhotra said the committee needs 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,” he said.

He added that the average inflation last year was only 2 per cent when the policy rate was reduced to 5.25 per cent. Now, however, not only has headline inflation already averaged 3.93 per cent this year, even core excluding precious metals is expected to converge to core inflation in the last quarter of this financial year. Core inflation is projected to average 4.3 per cent in FY27.

“This may suggest a recalibration of the policy rate,” Malhotra said. The MPC cut the policy rates by 125 basis points (bps) to 5.25 per cent between February and December of 2025.

Among external MPC members, Saugata Bhattacharya, economist and senior fellow at the Centre for policy Research, also talked about the “normalisation” of headline inflation from lower levels.

“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,” Bhattacharya said.

Internal MPC member Indranil Bhattacharyya said headline inflation is on a clear upward trajectory, averaging 5.6 per cent over the next 9 months, i.e., from October-December this year to April-June of FY27.

“Looking ahead, inconsistent monsoon and evolving El Niño conditions pose a direct threat to rainfall distribution and agricultural yields. Moreover, intermittent geopolitical shocks are fuelling sharp but volatile two-way movements in global oil prices blurring the near-term outlook,” he said, adding that a confluence of both these factors can precipitate sustained food and fuel shocks that can get deeply entrenched, resulting in the generalisation of inflation.

RBI has projected headline CPI inflation at 5 per cent for FY26 and 5.3 per cent for the first quarter of FY28. Core inflation was projected at 4.3 per cent for FY27.

Citing RBI’s enterprise surveys, external MPC member Ram Singh, director, Delhi School of Economics, said input cost pressures have built up and are starting to work their way through headline CPI prints.

“While the projected numbers are within the FIT (Flexible Inflation Targeting) range, upward deviations from the 4 per cent target are expected to be significant and may persist for several quarters,” he said. On the growth front, the economy has shown remarkable resilience, he added.

Another external MPC member, Nagesh Kumar, director, Institute for Studies in Industrial Development, emphasised the need to remain “extremely cautious” in a highly uncertain economic environment.

“The slight improvement in the growth and inflation outlook of the Indian economy should not be a cause for any complacency,” Kumar said, adding that the agriculture outlook continues to remain clouded by the El Niño effect, although the monsoon deficit has been mitigated in July in several parts of the country.

All eyes are now on the next meeting of the MPC which is scheduled for October 5-7.

Minutes of the August 5 MPC meeting demonstrated neutrality with a consensus on maintaining a pause while seeking greater clarity on inflation, said economists at Barclays in response to the minutes of the MPC meeting.

“The tone of the MPC policy statement on August 5 was truly neutral, in our view, and while the minutes of the meeting discussed policy tightening, a pause ultimately prevailed as members await greater clarity on inflation risks,” they said.

“We think the risk of an earlier hike would only materialise if inflation shows signs of sustained second-round effects, such as cascading fuel costs into broader transportation fare hikes and/or slower-than-expected monsoon rainfall that translates into a food supply and consequent price shock,” they said. Barclays expects the RBI to keep rates on hold in 2026, before hiking by 50 bps in the first half of FY27.

Minutes of the MPC meeting display a hawkish tone acknowledging the impact of risks, according to an SBI report.

“RBI MPC meeting minutes released today are an important source of communication regarding the future course of monetary policy… the August minutes indicate hawkishness at its peak… an acknowledgement of risk clearly exists,” SBI said in a report. The yield on the 10-year bond fell 4 bps and that on 5-year bonds was down 9 bps after the policy announcement on August 5.