The upcoming meeting of the Monetary Policy Committee (MPC) in early August is keenly awaited, as multiple global and domestic developments have taken place since the last meeting in June.

The main conundrum faced by the MPC is whether to continue with the “wait-and-watch” approach given the persistent uncertainty from everlasting West Asia tensions, or to hasten to turn the tide towards restrictive monetary policy, amid growing first round inflationary risks from El Nino and high crude oil prices.

The year-on-year (YoY) CPI inflation hardened from 3.5% in April 2026 to 3.9% in May and further to 4.4% in June, reflecting the passthrough of elevated global energy prices via fuel price hikes, and higher inflation for edible oils, readymade food items and restaurants.

Nevertheless, the stricter measure of core CPI inflation (CPI excluding food & beverages, fuel &light, petrol, diesel and jewellery) remained at comfortable levels (2.4%/2.5% in May/June 2026), suggesting that demand pressures were largely subdued. This offers the chief support towards an extended pause on the monetary policy front.

Having said that, the southwest monsoon has been deficient and rather erratic so far, fuelled by the developing El Nino conditions. After recording a large deficit of 40% from normal levels in June 2026 (steepest in 12 years), rainfall picked up in July, trending at 102% of the long period average (LPA) during July 1-26. Consequently, the cumulative rainfall stood 15% lower than LPA during June 1- July 26, 2026.

Benefitting from surplus rains, the YoY contraction in kharif sowing narrowed materially to 4.7% up to July 24, from as high as ~21% till July 5, 2026.

GDP growth had eased somewhat to 7.8% in Q4FY26 from 8.0% in Q3, while remaining robust amid stronger-than-expected performance of the services sector. This suggested that the economy did not see a material impact of the West Asia conflict in the quarter. Thereafter, the YoY expansion in several high frequency indicators slowed in April-May, before witnessing a strong recovery in June.

This largely reflects some favourable impact of the transient ceasefire between the US and Iran and the resultant fall in global commodity prices on domestic economic activity, as well as the large rainfall deficit in June that offered extended period for construction and mining activities, and a low base across some indicators.

Given better-than-expected volume performance in June 2026 and Q1FY27as a whole, ICRA projects the GDP to grow by a healthy 6.4-6.6% in the quarter. However, this is much weaker than the level seen in Q4FY26 and exhibits the impact of high energy and commodity prices and limited availability of inputs on the margins of some sectors. The upper end of this range coincides with the MPC’s growth forecast for Q1FY27.

The growth and inflation projections have yo-yoed materially over the last few months, in line with geopolitical developments and global commodity prices. Consequently, ICRA expects the MPC to remain in a cautious mode and maintain a status quo on policy rates and stance.

Nevertheless, there is a likelihood of a rate hike in the latter part of the fiscal, after there is some clarity around monsoon turnout and its implications for farm output and rural demand, contingent on the generalisation of inflationary pressures becoming more evident across the CPI basket.

(The author is chief economist, head – research & outreach, ICRA)

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.