Policy rates may need recalibration: RBI Governor

“Any evidence of these risks materialising may need policy tightening,” Malhotra said, according to the minutes of the August Monetary Policy Committee (MPC) meeting released by the RBI on Wednesday.

Malhotra, however, said he would prefer to wait for greater certainty on the persistence of elevated prices before recalibrating the policy rate. The MPC, at its August meeting, kept the repo rate unchanged at 5.25% for the fourth consecutive time and retained its neutral stance.

Several MPC members also indicated that a rate hike could become necessary during the year if oil prices and other external headwinds persist and inflationary pressures intensify.

“The scope for any further easing does not seem to exist at the current juncture. Instead, given that the headline inflation is projected to peak to a level as high as 5.9% in Q3 2026-27, a case for a hike may emerge during the course of the year,” said RBI Deputy Governor Poonam Gupta.

MPC member Ram Singh also flagged the need for policy action if conditions deteriorate. “If external shocks worsen or the second-round price effects spread widely, we should be able to swiftly adjust policy to protect macroeconomic stability,” he said.

Saugata Bhattacharya said the growth-inflation dynamics would need close monitoring to determine the appropriate time to recalibrate the policy rate.

“I judge it appropriate to await evidence of a further pickup in aggregate demand and generalisation of price pressures before taking the next policy action. Another factor which needs to be tracked are the levels of real interest rates,” he said.

While all MPC members voted to maintain the status quo on the policy rate, their comments reflected a cautious approach amid a highly uncertain environment.

“The shift in the distribution towards higher inflation numbers warrants a careful vigil. One must look out for the extent of generalisation and risk of inflation expectations getting unanchored before contemplating any rate hike,” MPC member Indranil Bhattacharyya said.

The August policy was guided by a wait-and-watch approach, even as the RBI raised its FY27 GDP growth forecast to 6.7% from 6.6% and lowered its inflation projection to 5% from 5.1%.

Despite the conflict in West Asia disrupting supply chains, heightened global uncertainty and an erratic monsoon, the Indian economy performed better than expected in the first quarter of FY27 and is expected to remain resilient, Malhotra said.

The RBI on Wednesday released the minutes of the 62nd meeting of the MPC, held from August 3 to 5.

Gupta emphasised the role of crude oil prices in determining the future course of monetary policy. While the April policy had assumed an average oil price of $85 a barrel and the June policy $95 a barrel, she said the current situation warranted a modest revision.

“Based on current assessment of oil price futures, it would be reasonable to expect oil prices to average about US$90 per barrel during the year, close to the level assumed in the IMF’s WEO update of July 2026,” she said.

MPC member Kumar highlighted the economy’s resilience on the growth front, noting that bank credit growth reinforced the outlook for real GDP growth of 6.7% in FY27.

However, he cautioned that uncertainty continued to cloud several key monetary policy indicators. While the economy had so far absorbed the spillovers from the conflict with limited impact, strains were becoming increasingly visible, he said.

“We have to closely watch if and how inflation-related risks resolve — El Niño’s effects on food inflation and global oil prices. As of now, it makes sense to retain all the maximum operational flexibility needed to respond to an evolving inflation trajectory,” Kumar said.