Foreign currency inflows to support domestic liquidity: RBI's MPC member

The growth-inflation outlook remains clouded despite easing West Asia tensions, with risks from food prices and supply chains, says Bhattacharya

Saugata Bhattacharya, member of the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC), says while high-frequency indicators suggest continuing economic resilience, they indicate a loss of momentum, which is the reason for a lower growth projection for FY27 as compared to the previous year. In an interview on the phone with Manojit Saha, Bhattacharya, based in New Delhi, says the outlook for the growth-inflation balance remains clouded even after the West Asia peace treaty. Edited excerpts:

 

In the minutes (of the June meeting of the MPC) you said the outlook on the growth-inflation tradeoff was clouded. With brightened prospects of the end of the war, do you think clarity has emerged on the tradeoff?

 

First of all, let me state that the views are my own, not the MPC’s. The MPC’s forecasts on growth and inflation were based on, among other assumptions, crude-oil prices averaging $95 a barrel. Based on oil futures, this now appears likely to be lower. However, disruption in supply chains is likely to persist for some time, and hence it is difficult to predict the extent of growth recovery in FY27 as well as the path of inflation. The latest MPC forecasts of growth and inflation are probably the best indicators as of now.

 

With international prices of crude oil declining sharply since the June meeting, and the expected reopening of the Strait of Hormuz, do you think the MPC can again be growth-supportive?

 

The MPC’s mandate is “to maintain price stability while keeping the objective of growth in mind”. While seemingly clear, operationalising this is a complex exercise. After the meeting, the May 2026 CPI (consumer price index) data (the data came in June) has suggested some modest input cost passthroughs to retail inflation. The persistence or acceleration of these passthroughs — the second-round effects — needs to be monitored for signs of retail inflation getting embedded. As noted in my statement, the outlook for the growth-inflation balance remains clouded, even after the treaty.

 

Which is the bigger casualty of the conflict — growth or inflation?

 

At the time of the MPC review, there were risks to both inflation and growth. While high-frequency indicators suggested continuing economic resilience, they indicated a loss of momentum. This was the reason the forecast for growth in gross domestic product for FY27 was a lower 6.6 per cent than the (then) FY26 estimate of 7.6 per cent. If the growth rate goes down, the effects of lower disposable incomes on companies’ pricing power, and hence on inflation, will be difficult to predict. There are too many elasticities involved.

 

Does a deficient monsoon adversely impact the RBI’s inflation projection for FY27?

 

A deficient monsoon per se is a risk for food inflation. If it happens, even with the proactive government countermeasures, food prices are likely to increase. However, the effects of higher food prices on other discretionary consumption expenditures, given income constraints, need to be monitored. These are third-round effects.

 

The RBI and government have taken steps to boost foreign inflows. Do you think the inflows will be able to plug the deficit in the balance of payments in FY27?

 

The magnitude of foreign-currency inflows after the coordinated measures of the government and RBI has been estimated by economists and market analysts and widely disseminated in media reports. These inflows will most likely balance the projected FY27 current-account deficit (according to the forecasts in the RBI Survey of Professional Forecasters). Given the early signs of an agreement in West Asia, I remain optimistic.

 

How do you see the RBI’s liquidity-management strategy evolving following the recent measures to attract foreign flows?

 

On liquidity management, I speak in my personal capacity as an economist since this is not the MPC’s remit, although this has a major role in operationalising the repo-rate decisions. Also, the RBI, over the past many years, has maintained systemic liquidity at sufficient levels. Prima facie, the expected foreign-currency inflows will add to autonomous domestic liquidity if even some of the inflows are absorbed by the central bank to replenish foreign-currency reserves, without matching sterilisation. As an indicative metric, let me point out to you a relatively recent study in the April 2026 MPR (Monetary Policy Review), which suggested that a liquidity surplus of 0.6 per cent to 1.1 per cent is likely to keep the weighted average call rate 5-10 basis points below the repo rate.