MPC flags possibility of policy tightening
Indian monetary policy makers may tighten rates in the third quarter if inflation risks materialize. Higher food and fuel prices could lead to broad-based inflation, prompting action. Inflation is projected to peak at 5.9% in Q3 2026-27, signaling potential policy shifts. The central bank remains watchful of global economic turbulence and its domestic impact. Monetary response is warranted if…
The Reserve Bank of India's monetary policymakers have suggested the possibility of tightening monetary policy in the third quarter if rising food and fuel prices lead to a broader increase in inflation, according to the minutes of the August monetary policy meeting. RBI Governor Sanjay Malhotra emphasized that risks of a broad-based inflation increase remain even though there was no evidence of overheating in prices despite monsoon irregularities and conflict escalation in the Middle East.
He stated that any evidence of these risks materialising may necessitate policy tightening. Deputy Governor Poonam Gupta echoed similar concerns, noting that inflation could peak at 5.9% in Q3 2026-27, prompting a potential hike during the year. The projected headline inflation for FY27 is 5%, with a 4.7% projection for Q3 and a 5.5% projection for Q4.
Core inflation, excluding food and fuel price impacts, is expected at 4.3% for FY27. Malhotra stated that monetary response to a supply-side shock is warranted if it leads to generalised inflation, de-anchoring of inflation expectations, or persistent inflation. The RBI maintained a neutral stance, keeping the policy rate unchanged at 5.25% despite signs of inflation normalization.
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