Importantly, as was indicated by the central bank Governor Sanjay Malhotra, it is not only the headline inflation that is now being looked at, but core inflation is also under consideration for decision-making. The widening of the inflation pressures is evident in the exclusion-based measures of core inflation too. CPI excluding food, fuel and precious metals has consistently moved up from the beginning of the current financial year (FY27), when it was at 2.2 per cent, to record 2.9 per cent in August.
The assessment on the inflation dynamics is that pressure will continue from the supply side — both on account of the deficient southwest monsoons that are also expected to have implications for rabi cropping due to lower soil moisture levels and weak reservoir levels in certain pockets. The expression of the inflation concerns comes out through the change in projection on inflation for the remaining part of the year.
FY27 average has been increased by 20 bps to 5.2 per cent, while third quarter (Q3) and Q4 inflation forecasts have been increased by 10 and 20 bps, respectively, to 6 per cent and 5.7 per cent. On the other hand, the assessment on growth for FY27 has been increased to 7.1 per cent from 6.7 per cent earlier, thereby providing the platform for the RBI to push the pedal on rates without worrying too much on the growth sacrifice. More important than the policy action, which was already in the price, was the forward guidance on rates. Crucially, with a 4:2 majority, the stance was changed from “neutral” to “calibrated tightening”.
We must wait for the minutes to understand the minds of the dissenters. However, as explained by the Governor, a “calibrated tightening” would mean a milder form of tightening that will be more measured and after having taken into consideration the evolving conditions on the growth-inflation mix. Clearly, though, a cut is off the table — something that was a possibility when the stance was “neutral”.
After the rate hike has started, the immediate question on everyone’s minds — how many and at what frequency. Traditionally, economists, including myself, look for a real rate of around 1 per cent over the longer-term inflation forecast to arrive at the nominal terminal rate. By this method, RBI can be expected to hike by an additional 100 bps to bring the terminal rate to 6.5 per cent. Having said that, at the presser Gupta clarified that the real rate is a theoretical construct, difficult to estimate and thus cannot necessarily guide monetary policy.
Thus, going forward, the RBI will evaluate data developments both domestically and internationally to incrementally decide on the rate structure. For now, I would bet on two more rate hikes of 25 bps each in the current cycle.
The author is chief economist at Yes Bank. 
 "rbi, reserve bank of india")