No risk of stagflation, underlying economic fundamentals strong: Ram Singh

Ram Singh says while such a pause cannot fix the supply disruption, it is an effective tool to mitigate a growth sacrifice that would worsen the output gap

Ram Singh, an external member of the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC), who supported dovish pause during the April meeting of the rate-setting panel, says in an interview to Manojit Saha while such a pause cannot fix the supply disruption, it is an effective tool to mitigate a growth sacrifice that would worsen the output gap. Edited excerpts:

 

In the minutes, you stated there is a case for a dovish pause. Does that mean you are more concerned with the impact on growth due to the supply shock than with headline inflation?

 

Today’s geopolitical scenario has many unknown unknowns, whose economic impacts on growth and inflation are unquantifiable. However, the current inflation-growth dynamics justify a dovish pause. As of now, the forecast for Consumer Price Index (CPI) inflation is 4.6 per cent for financial year 2026-27 (FY27). CPI inflation is projected to peak in the third quarter (Q3) of FY27, but is expected to moderate afterwards. The Centre has done a very good job of controlling prices, retail prices of petrol, diesel, and liquefied petroleum gas (LPG). Supply of gas and fuel products to the commercial sector has largely been restored. So, the first-round price effects have been limited in magnitude and coverage. Overall, I expect the second-round impulse from the sharp escalations in crude oil prices to be gradual and moderate.

 

While a dovish pause cannot fix the supply disruption, it is an effective tool to mitigate a growth sacrifice that would worsen the output gap. Combined with adequate fiscal and monetary support, a dovish pause can help MSMEs (micro, small, and medium enterprises) deal with the shock, thereby minimising the adverse impact on income and demand among middle-income groups. Recent increases in natural and petroleum gas prices, and supply-side disruptions have disproportionately affected the MSMEs, who lack the working capital to tide over these shocks. Any indication of a rate hike now would add a funding shock to their "supply shock”, potentially turning a temporary disruption into a permanent demand contraction. A lot will depend on whether the West Asia conflict ends in coming weeks. The growth-inflation tradeoff can change significantly if it does not.

 

You say the economy may have moved from a “Goldilocks” phase to the opposite extreme. Are you implying that there is a risk of stagflation if crude oil remains elevated?

 

The West Asia conflict has the inflation-growth dynamics moving in diametrically opposite directions — from low inflation-high growth to a state where inflation is higher, and growth has taken a hit of 50-60 basis points (bps). However, there is no risk of stagflation. The underlying economic fundamentals are strong, as evidenced by recent data. As reported by Business Standard (April 27, 2026), in FY26, domestic private investment grew by approximately 41%, reaching ~41 trillion. Health growth rates registered by private consumption and credit growth in the last financial year also speak of the inherent strength of the economy. Assuming the conflict is resolved in the coming weeks, we can expect to grow at a rate of 6.5 per cent or more.

 

At what level of headline inflation will you start to get worried? How concerned are you about the second-round effects of inflation?

 

I expect the second-round price effects of the pass-through to be fast but moderate. Two factors will help keep the second-round effects of the pass-through in check. One, at the household level, we are witnessing greater use of induction cooking and electricity in the commercial sector, which is improving the energy mix and reducing the oil intensity of gross domestic product (GDP). Two, thanks to our huge refining capacity, we are net exporters of downstream products (of crude) such as petrochemical derivatives like plastics, paints, synthetic fibres, chemicals, etc. Having said this, today’s geopolitical scenario has many unknown unknowns, whose economic direct and indirect impacts are unquantifiable. Under these circumstances, it is prudent for the monetary policy to be data-driven. The pause is justified to see how widespread and persistent the second-round price effect is.

 

All the external MPC members commented on the depreciation of the rupee and the current account deficit (CAD). Was the depreciation of the rupee a consideration for the policy decision?

 

The MPC’s mandate is to be guided only by inflation data and growth data. During MPC deliberations, we discuss every issue relevant to the Indian economy. Exchange rate, FPI outflows, and CAD are deeply interconnected, and directly influence the degree of imported inflation in India. Last year, FPI outflows due to profit-booking and repatriation by foreign investors contributed to the rupee’s depreciation. More recently, crude oil price crossing $100/barrel has put pressure on the rupee exchange rate. Research suggests a significant “exchange rate pass-through” to several categories of domestic prices.

 

The RBI introduced a core inflation forecast in the April monetary policy. How do you view this development?

 

The inclusion of the core inflation forecast in the monetary policy statement is a step toward greater policy transparency and a signal of the maturing of India’s monetary framework. By providing a clearer sense of the RBI’s assessment of long-term inflation drivers, it will enrich the public’s understanding of volatile supply-side shocks (such as food price spikes due to El Niño) and the broader demand-side dynamics. For instance, the core inflation forecast at 4.4 per cent — which is even lower when excluding precious metals — conveys that underlying demand-side pressures are expected to remain contained. As the RBI governor has stated, this is not a shift in how monetary policy is conducted. The headline CPI inflation remains the primary target for the flexible inflation targeting framework.

 

 You highlighted a 40 per cent increase in Brent crude prices. Do you see the possibility of a sharp increase in petrol and diesel prices shortly as crude oil rates remain elevated?

 

So far, the Centre has managed to keep retail prices of petrol, diesel, and LPG in check. Supply of gas and fuel products to the commercial sector has been managed fairly well. As a result, the first-round price effects have been limited in both magnitude and coverage. If the West Asia conflict is resolved in the coming week or two (there are favourable signs of this happening), we can expect the average crude price to be $85-90/bbl.

 

If the conflict persists with elevated crude oil prices, increases in petrol and diesel prices will become inevitable. As escalated crude oil price is an adverse terms-of-trade shock for the economy, some of its pass-through is not only inevitable (from a fiscal point of view) but actually desirable. The current energy basket for household and commercial sectors is sub-optimal by international standards.

 

In 2025, the share of electricity in China's total final consumption reached 28 per cent, while in India it is only about 20 per cent. Share of electricity in energy basket of China’s manufacturing is around 28 per cent; in contrast, it is only about 16 per cent for India. We have the capacity to accommodate greater electricity demand from the commercial and household sectors because our total installed capacity, especially in renewables, exceeds what we are consuming today.

 

Crude oil pass-through will nudge the household and commercial sectors to improve efficiency of their energy basket. The record electricity demand in the last week (an excess of 250 gigawatt) is, on this count, at least partly due to this.