Consumer Price Index (CPI) has breached 4 per cent for the first time in 17 months, Brent crude has swung by around 40 per cent within weeks amid see-sawing of US-Iran hostilities, and the rupee has weakened by nearly 1 per cent over the last one month. On the other hand, high-frequency indicators paint a mixed to steady picture, credit growth stays robust at nearly 18 per cent year-on-year (Y-o-Y), while overall financial conditions continue to support domestic demand. Against this setting, the key question is not whether the MPC acts immediately, but how it chooses to shape market expectations for the path ahead.
Inflationary pressures resurfaced after averaging a modest 2 per cent in 2025-26. The growth-inflation trajectory in 2026-27 could be shaped heavily from factors such as the monsoon outcome, the ability of supply chains to absorb disruptions, and durability of oil price premium stemming from geopolitical tensions. Kharif sowing is down 3 per cent Y-o-Y and food inflation stays sticky. Thus, effective food supply management is no less crucial to contain inflation. While core inflation remains benign for now, the Reserve Bank of India (RBI) will certainly try to ensure that persistent external shocks do not permeate the broader price basket through second-round effects.
Global central banks are increasingly turning hawkish, leading to tighter financial conditions globally. The recent hawkish pause by the US Fed was followed by the 30-year Treasury yield rising to its highest level since 2007. Moreover, growing concerns over concentration risks in AI-driven trades have heightened volatility across both equity and private credit markets. For context, South Korea’s stock market collapsed by nearly 30 per cent since the June 2026 peak, with the finance ministry announcing plans to ‘stabilise’ the market. A stronger US dollar and resultant widening yield differentials could further amplify imported inflation pressures to emerging markets. The RBI’s recent measures to attract dollar-denominated deposits provide a timely buffer, with expected inflows potentially reaching USD 80 billion or higher. Nevertheless, a near term relief for the rupee will depend on easing of geopolitical tension and moderation of energy prices.
Liquidity conditions draw support from the cost-less conversion of NRI dollar deposits into INR liquidity; however, it is partially counter-balanced by RBI's forex operations to stabilise the rupee. Consequently, system liquidity surplus has averaged less than 0.4% of banks’ NDTL since the last policy meeting, well below the 1.3 per cent about a year ago, while the call rate has risen by around 50 basis points since the start of 2026-27. With inflation likely reaching near the upper tolerance band in the second half of 2026-27, the RBI may prefer to stay extra-cautious as regards money market conditions. This configuration strengthens the case for a continued “wait-and-watch” policy stance, but with ample caution.
[The author is Chief Economist & Head of Research in Bandhan Bank. The author thanks Sudarshan Bhattacharjee and Gaurav Mukherjee for assistance. Views are personal.]
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