The six members of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) are scheduled to meet in Mumbai on Monday for the third of their bi-monthly meetings this fiscal year.
The six members of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) are scheduled to meet in Mumbai on Monday for the third of their bi-monthly meetings this fiscal year.
As always, the MPC has three options. Hike, hold or snip the policy rate of interest. Till as recently as April, the talk was about whether it would cut RBI’s repo rate or keep it unchanged. Raising it was seen as an unlikely option.
As always, the MPC has three options. Hike, hold or snip the policy rate of interest. Till as recently as April, the talk was about whether it would cut RBI’s repo rate or keep it unchanged. Raising it was seen as an unlikely option.
It is a measure of how sentiment has changed that this time round, there is hardly any talk of rate reduction. Instead, it is largely about whether the MPC should maintain the status quo or go in for a hike.
Recall, the last time monetary policy was tightened was in February 2023, when, under former governor Shaktikanta Das, the repo rate was increased to 6.5%, after which it was kept unchanged at 6.5% for 11 consecutive meetings.
Then in February 2025, under Das’s successor Governor Sanjay Malhotra, the MPC unanimously decided to lower it to 6.25%. This was followed by a series of rate cuts till December 2025, when the repo was reduced to the current 5.25%. The rationale was unassailable.
India’s GDP growth for 2025-26 was projected at 7.3% and retail inflation at 2%, well below the mid-point of RBI’s target range of 2-6%.
Since then, the Indian economy’s growth- inflation trade-off has changed quite dramatically. Today, we need a renewed focus on price stability. Data explains why.
At the MPC’s April meeting, growth for 2026-27 was forecast at 6.9% and inflation at 4.6%. The outlook on those two variables, however, has shifted. India’s price incline has steepened while its pace of economic expansion has slowed only a bit.
At the June MPC huddle, inflation was projected significantly higher at 5.1%, but real GDP growth for 2026-27 was pegged only slightly lower at 6.6%. Despite this, the MPC opted to keep both its rate and ‘neutral’ stance unchanged for the third time in a row.
The net result? June saw people’s cost of living gain pace to an 18-month high, even as wholesale inflation was a breath away from double digits at 9.9%. At the same time, growth remains satisfactory, with even conservative estimates placing it above 6.5% this fiscal.
Admittedly, retail inflation last recorded at 4.4% could count as price stability, given RBI’s central target of 4%.
Yet, the portents are clear. It is only a matter of time before the wholesale flare-up affects shopping bills. High oil prices, insufficient rains, ample liquidity and a skittish rupee mean the odds of price relief are bleak.
Under these circumstances, the MPC faces a stark choice: hold the rate of interest at which it lends banks short-term funds steady and risk a worse inflation scenario, or charge more and risk slowing credit offtake and GDP growth.
On paper, there is a strong case for a repo hike on 5 August. It is also true that RBI could not quell the last outbreak of inflation within its three-quarter limit. This year’s supply snags differ, but like then, India’s central bank stares at too much money chasing too little to buy—a monetary phenomenon to the extent it involves money. And global macro conditions seem far more fragile. So the MPC must tread warily.
As a soft option, it could change its stance. It shifted to ‘neutral’ from ‘accommodative’ in June 2025, although RBI’s infusions of liquidity stayed hearty. The MPC could stay on that path and change its stance to ‘withdrawal of liquidity.’ Or, at the very least, issue a hawkish statement.