When the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) meets this week, it will face a choice between holding the policy repo rate and raising it from the current level of 5.25%. Both courses of action have some justification. A pause makes sense given that economic growth remains robust and inflation has surpassed the RBI’s 4% target rate only once this year (in June 2026).
A pre-emptive rate hike to shield against inflationary pressures and protect capital inflows also seems justified—after all, many advanced economy central banks (Europe, Japan, Australia) began tightening earlier this year. If the RBI chooses to pause, as widely expected by market experts, will it fall behind the curve? A central bank is “behind the curve” if it fails to raise rates quickly in response to inflation. Naturally, the RBI is not expected to respond to a single over-4% inflation print with a rate hike. But if it waits too long and reacts too slowly, it risks a rapid buildup in inflation.
The MPC meeting is currently underway and a decision will be announced on Wednesday. All 10 economists polled by Mint expect a pause in rate and a neutral stance in the current meeting. Several economists described it as a policy “non-event”, but said the RBI's communication is likely to strike a cautious, if mildly hawkish, tone.
Taylor’s Rule
In 2022, James Bullard, then president of the Federal Reserve Bank of St. Louis, identified two ways to assess whether a central bank was behind the curve. The first approach is to use monetary rules such as Taylor’s Rule to determine the appropriate level of policy rates. If the actual policy rate is below the recommended rate, then the bank is likely to be behind the curve. A simple Taylor specification for India, assuming a 4% inflation target, 7% potential growth rate, and equal coefficients on inflation and output gaps, suggests that monetary policy was tighter than prescribed until recently. However, the RBI seems to have fallen slightly behind the curve in Apr-June: according to Taylor’s rule, a rate hike is recommended.
Of course, there are drawbacks to following monetary rules. Policy rates adjust slowly over a rate cycle; they cannot be instantly increased or decreased as per rule-based benchmarks. In addition, recommendations are only as good as underlying assumptions—even a slight change in model parameters can completely alter the interpretation. For example, if the neutral interest rate is set at 1.5% (instead of 1.65%), the Taylor rule throws up a recommended policy rate of 5.20%, suggesting that the RBI may need to cut rates.
Market signals
A second, and more intuitive approach is to rely on market rates such as the highly traded 1-year Overnight Interest Swap (OIS) rate, which is a reasonably good predictor of the policy repo rate. The 1-year OIS rate has been on an uptrend since the US-Iran war started in March 2026; it dropped slightly in June after measures were announced to shore up dollar inflows. By mid-July, renewed hostilities in Iran and rising oil prices pushed OIS rates up again. On 30 July, the 1-year OIS rate was about 5.95%. This suggests that markets expect the repo rate to rise by 70 basis points, which implies at least two 25 bps hikes in the current financial year.
Inflation mix
But monetary policy is much more than following a formula or reading market signals. Rate decisions need to reflect current economic reality while simultaneously being forward-looking. In this context, two points are worth highlighting. First, while inflation is rising, it has not yet become so generalized and broad-based as to be a cause for alarm. In June 2026, 24% of the consumer price index (CPI) basket was over 6% and 32% over 4%. For comparison, during the previous high-inflation episode in January-December 2022, the corresponding shares of weights over 4% and over 6%were 79.5% and 52.8%, respectively. Second, there is considerable uncertainty about the future path of inflation.
The resumption of US-Iran hostilities could push up oil prices: indeed, Brent crude has already surged above $100 per barrel in July. El Niño is another major risk with uneven rainfall distribution, delayed start of monsoon, and lower reservoir levels adding to inflation risk. The fact that inflation is not broad-based across all items favours a pause, but the threat of El Nino impacting food prices favours a rate hike.
Policy room
The August MPC is important because there are consequences to falling behind the curve—once inflation is high and entrenched, it is harder to manage with monetary policy. But it is not a now-or-never decision. IMF research shows that a small delay, when combined with aggressive rate action, is equally effective in controlling inflation. We saw this in the last two rate hike cycles: RBI started raising rates after some months of over-4% inflation, but made up for it with rapid rate hikes that brought down actual inflation as well as household perceptions of inflation.
Hence, pausing now may not mean falling behind the curve, provided the RBI signals a willingness to act swiftly if inflation remains persistent.
The author is an independent writer in economics and finance.