Little has changed in West Asia since the Monetary Policy Committee (MPC) last met in early June, with uncertainty surrounding the Iran-US war persisting. Crude prices fell sharply to around $72 a barrel on hopes of a truce, but the subsequent re-escalation of hostilities pushed them back into the $90-100 range.
At its June meeting, the MPC left the policy rate unchanged at 5.25%, even as the Reserve Bank of India (RBI) raised its FY27 inflation forecast by 50 basis points to 5.1%. Governor Sanjay Malhotra flagged the risk of second-order effects, including higher wages, but retained the neutral policy stance.
The August meeting will, therefore, be less about responding to a fresh shock than assessing whether the risks identified in June have become sufficiently persistent to warrant action. With few signs of an early truce, elevated oil prices remain a concern. Crude is currently trading at around $88 a barrel — below the $95 assumption underlying the RBI’s growth and inflation forecasts, but high enough to keep price pressures alive.
If oil remains at these levels, another round of fuel price increases cannot be ruled out. Retail inflation rose more than expected to 4.4% in June, partly reflecting higher pump prices, and the July print could be higher still. The food inflation outlook also warrants attention.
Although kharif sowing has progressed reasonably well and the rainfall deficit has been almost eliminated, crop shortfalls that push up food prices cannot yet be discounted. Nor can the indirect impact of expensive fuel on transport, manufacturing, and distribution costs. The longer crude remains elevated, the greater the likelihood that what began as a supply shock spreads to the wider price basket.
There is, therefore, a case for raising rates pre-emptively rather than risking falling behind the curve. But there is an equally strong argument for waiting for clearer evidence that inflation is becoming generalised. As Malhotra observed recently, policymakers have yet to see signs of broad-based price pressures becoming entrenched.
Core inflation remained benign at 2.4% in May and 2.5% in June, suggesting that underlying demand pressures are contained. The risk of higher fuel, food, and input costs spilling over into the wider price basket is real, but it would be prudent to wait for evidence of such a pass-through — or signs that inflation expectations are becoming de-anchored — before raising rates.
The neutral stance gives the MPC the flexibility to hold or move in either direction as the data warrant, without diluting its commitment to price and financial stability.
Importantly, the RBI no longer needs to raise rates primarily to support the rupee. Around $32 billion has flowed in, largely through the special foreign currency non-resident (bank) deposit scheme. With a further $30-40 billion expected by the end of September, concerns over balance-of-payments pressures should ease considerably.
The governor has also sought to allay liquidity concerns, explaining that rupee funds released against deposits swapped with the RBI enter the system with a lag, while higher government balances have temporarily absorbed liquidity. This suggests that the present tightness need not be read as a deliberate monetary signal.
The economy, meanwhile, has remained resilient despite higher US tariffs and disruptions caused by the West Asia conflict, though some areas of weakness persist. That resilience gives the MPC room to raise rates later if inflation broadens or expectations begin to shift. For now, however, a pause would be the more considered course.