High-frequency indicators still point to resilience, but policy action will hinge on whether supply shocks spill into broader inflation, RBI MPC Member Saugata Bhattacharya tells Kshipra Petkar. He emphasised caution amid global spillovers and rising uncertainty, noting there remains space to respond if growth slows materially.
What specific indicators are you watching most closely to assess whether growth is meaningfully weakening?
Nowcasts are based on statistical models of high frequency indicators. The signals broadly indicate ongoing economic resilience, even amidst expectations of an economic slowdown. The high frequency indicators are those we usually follow: bank credit and deposit growth, vehicle sales, various survey responses, GST and other tax collections, e-way bills, trade data, the components of CPI inflation, and many more.
Which policy mistake worries you more now — tightening into a supply shock or easing amid rising inflation expectations?
As of now, the price shocks (which have not been absorbed by government and other public sector enterprises balance sheets) are predominantly supply driven. The MPC forecasts core inflation for FY27 at 4.4%, while “underlying” inflation (i.e., excluding the effects of precious metals, jewellery, etc.) is even lower. It would take persistent supply shocks for these to become structural inflation.
There are also likely adverse demand effects from higher input costs and physical shortages, especially in fuel-intensive manufacturing clusters. Income losses could gradually reflect in FMCG and other consumer non-durables, and reports of reverse labour migration add to uncertainty. How these dynamics feed into consumer prices remains to be seen.
Spillovers from supply shocks into demand-led price pressures via second- or third-round effects must be closely monitored. However, given current manufacturing capacity utilisation, imports from China, and other sources of slack, the risk of a significant shift toward demand-driven inflation appears limited for now. Therefore, there remains space for monetary policy to respond if growth slows materially.
Do you see second-round risks from elevated energy prices?
How much of higher input costs and raw materials are absorbed by energy retailers (and other enterprises which use petroproducts as inputs) remains to be seen. Ultimately, inflation pass-throughs will be determined by the quantum of the higher input costs each stakeholder in the supply chain is able to absorb.
The role of the fiscal balance sheet as a shock absorber is central to this transmission. If the supply chains disruptions persist, the higher costs will begin to leak into output prices. If affordability issues begin to result in reverse-migration-led labour shortages, wages will reinforce overall input costs. Layered on this are the other emerging risks.
Meteorological forecasts released post the MPC meeting show deficient rainfall (based probably on the risk of El Nino conditions in late summer). There is the risk of rising food prices. The weaker exchange rate might also increase the transmission of higher import costs on domestic prices.
However, I am at pains to emphasise, these are relatively long tail scenarios, and as of now, appear unlikely.
Three-month ahead household inflation expectations have risen sharply. At what point would you consider this “de-anchoring” significant enough to warrant a policy response?
The MPC forecasts have factored in adverse impacts on both growth and inflation. However, extrapolations of the growth inflation trade-off are not linear. A prolonged West Asia supply chain disruption can have very unpredictable consequences.
If such shocks become embedded in household inflation expectations, they could alter consumption and savings behaviour, with spillovers to investment and domestic savings. I also note with concern the recent industrial unrest in the capital region, which might result in a wage – price spiral – (although likely to be a local phenomenon), spirals which have been relatively rare in India.
If global central banks delay easing, how constrained is India’s policy space?
Given the increasing connectedness of global capital markets, there are bound to be spillovers from global central bank rate actions. Indian monetary policy has to be cognisant of the impossible trinity of open economy macroeconomics. However, the domestic macro-economic environment is the predominant influence on policy repo rate decisions, given inter alia that the share of the domestic economy in the over GDP is relatively higher compared to many of our peers. Also, as is the case with balancing domestic economic trade-offs, addressing the domestic and external objectives require separate instruments which are specifically suited to each one of the issues, even if the issues are interconnected. RBI has demonstrated exceptional ability in managing multiple, often conflicting, objectives.
What developments in the next two months would shift you from the status quo?
When we see significant evidence of the second and third round effects, including the pass-throughs of input costs, demand slowdown and labour dislocations, the combined impacts on the growth–inflation balance might prompt rate action. Any potential action will be conditional on a lot of caution, and will happen only if forecasts indicate inflation trajectories persistently moving towards the bands or if growth appears to be decelerating significantly down from the forecast. I emphasise, a lot of caution, given the heightened risks of policy mistakes amidst this uncertainty.