MPC

The decision to hold India’s policy rate steady in the face of inflation risks felt like a foregone conclusion. Now that RBI watchers appear to have assumed a hierarchy of policy goals, India’s central bank must mull over the potential consequences.

India’s central bank held its policy rate and stance steady, but the variable it must hold within a tight band is retail inflation. Did advocates of an inflation-targeting regime over-estimate its role in assuring the country price stability?

Rate hikes are more likely to be reactive than proactive, becoming a real possibility only if core inflation sustains above 4.5% in a broad-based manner.

Economists expect the RBI to keep the repo rate and policy stance unchanged, with markets watching its guidance on inflation, growth, the rupee and the timing of any future rate moves.

The RBI governor has reiterated that the central bank’s primary mandate is inflation control. India’s retail inflation has risen steadily to 4.4% in June from 2.7% at the start of the year. There are concerns around volatile crude oil prices and their impact on India’s fuel and overall inflation.

In a rare departure from the usual, the rate-setting panel's resolution announced on Friday not only overlooked inflation as a major risk, it was overshadowed by RBI governor Sanjay Malhotra's statement and an effort to attract foreign inflows.