The minutes of the Reserve Bank of India’s latest monetary policy meeting have signalled a shift in the debate from further monetary easing to policy normalisation, raising the prospect of a rate hike later this year, even as the October review is likely to see another pause.
“The debate within the committee has now shifted from how much further accommodation is available to when normalisation ought to begin,” QuantEco Research said, pointing to a clear change in the tone of the minutes from the previous policy cycle. It expects the RBI to hold rate in October, but said December has now become a “live option” for the rate hike.
The minutes were hawkish than the August policy statement, with Governor Sanjay Malhotra referring to the possibility of recalibration and Deputy Governor Poonam Gupta flagging a case for a hike. The shift comes even though there is, as yet, no clear evidence that the recent increase in food prices is broadening into a more persistent, demand-driven inflation problem.
Nomura said the minutes were “more hawkish than we expected” but argued that the trigger for tightening to curb demand was still absent. It said a rate move could eventually be justified by inflation settling at higher levels and the normalisation of real interest rates, even without a significant increase in core inflation.
For now, the MPC is likely to wait for more evidence. By the October meeting, it will have two additional inflation prints, first-quarter GDP data and greater clarity on the monsoon. The trajectory of crude oil prices and geopolitical risks will also be clearer.
“The uniform preference of almost all members to wait for more evidence and clarity suggests that a rate hike in the October policy is unlikely,” ICICI Securities Primary Dealership said. It estimates the current odds of an October hike at around 20%, although a sharp upside surprise in inflation or sustained crude prices of $85-95 a barrel could alter that assessment.
The inflation outlook will determine how quickly the RBI ultimately moves. Headline inflation is expected to rise in the second half of FY27 as higher input costs, deficient rains and adverse base effects exert pressure. Nomura expects inflation to rise towards 5-5.5% in H2FY27, although it still sees FY27 average inflation at 4.6%, below the RBI’s 5% forecast.
Barclays has also lowered its FY27 inflation forecast to 4.8%.
At the same time, growth remains sufficiently resilient to allow the RBI to prioritise inflation. “We believe growth is most likely to remain robust as shown by all leading indicators,” SBI Research said, maintaining its call for a prolonged pause through FY27.
The more immediate concern is whether inflation begins to broaden beyond food. ICICI Global Markets said the minutes placed greater emphasis on “risks to inflation becoming broad-based in coming months given buoyant demand”. It expects rate hikes to begin when demand-driven inflation aligns with core inflation, with its base case being a move once core inflation excluding gold crosses 4% in Q4FY27.
Barclays expects the RBI to remain on hold through 2026 and begin a gradual 50-basis-point hiking cycle in the first half of 2027, while QuantEco Research expects a 25-50 basis point increase before the end of FY27.