The economy has moved away from its “Goldilocks” phase amid the crude shock, but stagflation risks remain low and a rate hike is not warranted at this stage, MPC member Ram Singh tells Kshipra Petkar. Policy action, he said, would depend on clear evidence of sustained second-round effects rather than temporary supply disruptions.
Has the shift from a ‘Goldilocks’ phase increased stagflation risks, especially if crude stays elevated?
Since the onset of the West Asia conflict, the economy has moved away from the “Goldilocks” phase. Inflation risks have risen and growth forecasts have been trimmed by 50–60 bps. The MPC now projects FY27 real GDP growth at 6.9% and CPI inflation at 4.6%, assuming average crude at $85/bbl.
A prolonged conflict, higher crude prices or El Niño disruptions could pose further downside risks to growth and upside risks to inflation outlook. However, there is no risk of stagflation.
With CPI projected at 4.6% for FY27 and touching 5.2% in Q3, how much inflation are you willing to tolerate in order to cushion growth?
CPI inflation is projected to peak in Q3 of FY 27 but is expected to moderate afterwards. It is important that the inflation expectations are anchored. MPC will remain vigilant and be guided by the income data. The current level of the repo rate and the neutral stance provide the flexibility needed to respond to any situation that may arise in the future.
At this point, the inflation-growth trade-off seems manageable, with inflation forecast well within the tolerance band and a growth rate in the range of 6.5-7.00%
If crude stays above $100, does the burden shift to the fisc, risking future inflation spillovers?
Yes, but crude sustaining above $100 per barrel appears unlikely at this stage. Goldman Sachs sees Brent at $71/b in Q4 2026, while the U.S. Energy Information Administration projects $76/b in 2027. If the West Asia conflict eases in the coming weeks (there are favourable signs of this happening), for FY27 average crude could settle around $85–90/bbl.
The Centre has effectively contained retail fuel prices, limiting first-round inflationary effects. While higher crude is a terms-of-trade shock and some pass-through is inevitable, second-round effects should remain contained. Two factors help: growing adoption of electricity and induction cooking is reducing oil intensity, and India’s strong refining capacity makes it a net exporter of downstream petroleum products.
As a result, the inflationary impulse from elevated crude prices is likely to be gradual and moderate. In the coming weeks, we will have more clarity on crude oil prices and the second-round price effects.
If the shock is largely supply-driven, how effective can a rate pause be?
While it cannot fix the supply disruption itself, a dovish pause is an effective tool to mitigate a growth sacrifice that would worsen the output gap. The goal of a pause is also to wait and see whether the second-round price effect, especially in energy-intensive sectors such as steel, cement, and glass, persists.
Material increases in these prices and indications of the wage-price spiral would signal the onset of second-round effects. Only then will a case of monetary policy action arise.
Should monetary policy prioritise MSMEs despite potential external vulnerability risks?
Recent increases in input costs, driven by energy price spikes and supply-side disruptions, have disproportionately affected the MSME sector, which lacks the working capital to tide over these shocks. Any indication of a rate hike now would add a funding shock to the input supply shock, potentially turning a temporary disruption into a permanent demand contraction.
A dovish pause in the repo rate, along with adequate fiscal measures, can help these firms deal with the shock, thereby minimising the adverse impact on income and demand among the low and middle-income groups.
With rupee weakness and a wider CAD, are external risks being downplayed?
As for the external sector, recent pressure on the INR reflects the sharp rise in crude prices, which has increased the oil import bill and widened the current account deficit. Some exchange-rate pass-through was inevitable and desirable.
If the conflict eases soon, the INR should stabilise and regain some ground in the second half of FY27, with forex reserve prospects remaining benign. Reducing oil intensity will also lower oil imports as a share of GDP.
There are additional positives: eight FTAs covering 37 countries, including the UK and EU, should support trade and investment this year. I expect FDI in FY27 to rise significantly beyond $80 billion. With corrected equity valuations, portfolio inflows could improve, and liberalised external commercial borrowings should add to reserves.
Gold imports are likely to be lower than last year’s $70 billion. Together, these factors should strengthen both the current and capital accounts, supporting the INR.
You’ve shifted the stance to neutral to preserve flexibility. What specific trigger would prompt you to vote for a rate hike?
We will have to watch out for the spread and magnitude of the second-round price effects. Only if higher energy costs ripple through the rest of the economy, leading to significant increases in general prices and indications of a wage-price spiral, would it signal that a monetary policy action is required. At the moment, an increase in repo rates is not on the cards.