Fears of inflation going out of control due to the West Asia conflict (which officially ended on Friday) and the impact on food prices because of the forecast of deficit monsoons have kept RBI’s monetary policy committee (MPC) members on a “wait and watch mode” at the June meeting.
The six-member panel unanimously voted to keep the policy rates unchanged even as they maintained the neutral policy stance. The members also do not see the commodity prices, especially the crude prices falling back to the pre-war levels anytime soon.
Driven by these fears, the panel at its 61st meeting held during June 3-5, revised upwards inflation outlook to 5.1% for the current fiscal, with Q3 printing in at a high 5.9%. On the one hand, inflation is inching up to 4.7% for FY27, on the other, they scaled down growth forecast to 6.6%, hinting that the Iran war impact will continue to linger on for many quarters more.
Voting in for maintaining the status quo on the policy rate at 5.25%, Governor Sanjay Malhotra, said, “I would prefer to adopt a ‘wait and watch’ approach and we should remain watchful and wary about the generalisation of inflation in the coming months.”
However, he said, “Our economic situation is quite strong and healthy vis-à-vis many of our peers as we are in a much better position today not only in terms of the current shock but also with respect to all earlier shocks.”
Furthering his call for caution, the governor said, “Though headline inflation continues to remain within the target, CPI is now projected to be above target at 5.1%. The increasing inflation trajectory for FY27 with its peak of 5.9% in Q3, which is close to the upper tolerance level of 6%, may suggest the need for monetary policy action. However, I’d prefer to wait and watch for the following reasons,” even though the current inflation merits attention as its outlook is clouded.
Stating that “we need to be watchful of the inflation trajectory,” he said “going forward, revision in retail prices of petrol and diesel would lead to higher fuel inflation in the coming months. While the near-term outlook for food prices remains favourable on account of a good rabi crop and adequate stocks, risks have amplified, especially from a below normal monsoon as predicted by the Met department and likely El Niño conditions.”
Deputy governor Poonam Gupta who is also in-charge of the monetary policy department, also cited the inflation pressure for her vote to keep the rates unchanged due to the global uncertainties.
“While supplies have been secured from diverse sources, albeit at higher prices, compounded by higher shipping and insurance costs, and exchange rate depreciation, prices have been partially passed through to consumers. These developments have led to a revision in our forecasts of growth and inflation.”
External member Nagesh Kumar said notwithstanding the factors that make the Indian economy better equipped to withstand the current shock than the previous ones, the economic outlook has been adversely affected—with FY27 growth projected at 6.6%, a full 100 bps lower than FY26 growth of 7.6% while inflation is projected at 5.1%, a full 300 bps increase over 2.1% in FY26.
On inflation risks, another external member Saugata Bhattacharya said in addition to the ongoing commodity supply shocks, the Met forecast of deficient rains signal the need for heightened awareness on agriculture output and prices.
“Energy prices are unlikely, in the near or even the medium term, to return to their pre-conflict levels. Every additional day of persisting disruptions is likely to result in a non-linear escalation of cumulative macroeconomic consequences. On inflation expectations, in particular, inflation expectations survey shows a consistent and significant increase in one year ahead inflation expectations,” he said.
The third external member Ram Singh also cautioned against inflation spike, saying since the last MPC meeting there have been material changes in the domestic price and growth trade-offs due to the persistence of the West Asia conflict and its implications.