The decision was unanimous. There is no change in the stance of the monetary policy too – it remains neutral.
The governor’s statement has not given any forward guidance as the outlook is “hazy” | because of uncertainties regarding the south-west monsoon, El Niño, geopolitics and global trade policy.
There are, however, changes in the estimates of both the GDP growth as well as inflation for FY27. The RBI has raised its growth forecast by 10 basis points (bps) for the year to 6.7 per cent and dropped the inflation forecast by identical margin to 5 per cent. One bps is a hundredth of a percentage point.
The 10-bps upward revision is on account of revisions in the first and second quarter growth estimates even as the estimate for the second half growth in FY27 remains unchanged.
The first quarter GDP growth projection has been raised 40 bps to 7 per cent and that of the second quarter by 10 bps to 6.4 per cent, compared with the RBI’s June estimate. The growth estimate remains unchanged at 6.5 per cent for the third quarter and 6.8 per cent in the fourth.
In June, the governor’s statement had said, “Prolonged global supply chain disruptions, volatility in global financial markets, and weather-related shocks continue to pose downside risks to the domestic growth outlook.” Going by the latest statement, the “risks are evenly balanced.” It has also estimated the first quarter growth of FY28 at 7.3 per cent.
The first quarter inflation came in at 3.9 per cent, lower than the RBI’s June estimate of 4.2 per cent. The central bank has revised downwards the second quarter inflation estimate by 40 bps to 4.7 per cent. The projection for the third quarter has been left unchanged at 5.9 per cent; the fourth quarter estimate has been raised by 10 basis points to 5.5 per cent.
While the June projections were laced with a caveat of “upside risks”, for the latest estimates, the risks are evenly balanced. The RBI’s inflation estimated for the first quarter of FY28 is 5.3 per cent.
The policy statement has pointed out that although generalised inflation pressures continue to remain modest, the risks of second-round impact of higher food, fuel and other input prices translating to broad-based inflation persist. The RBI will do whatever it takes to facilitate sustainable growth and preserve the stability of prices.
When will we see a rate hike? Going by the RBI’s inflation estimate, from the third quarter onwards, the real rate will turn negative if the policy rate is not raised.
A real rate, commonly referred to as real interest rate or real rate of return, is a financial metric that looks at the rate adjusted for inflation to reflect the true change in purchasing power. Inflation, as estimated, is expected to be 5.9 per cent and 5.6 per cent, respectively, in quarter three and four while the policy rate is 5.25 per cent.
Should there be a rate hike in December, preceded by a change in stance in October? It seems difficult to predict at this point. The sudden drop in the Brent Crude price (from $95 a barrel to $79 a barrel, in past fortnight) and the massive flow of NRI deposits have created a cushion for the RBI – it doesn’t need to be in a hurry to hike the policy rate, it seems, unless the external circumstances dramatically change for the worse.
Another interesting point is the RBI’s focus on core inflation – or non-food, non-oil inflation. The central bank’s mandate is targeting the headline consumer price index or CPI inflation. It has a flexible inflation target – 4 per cent with a 2-percentage point tolerance band on either side (4 per cent+/-2 percentage points).
The policy statement projects core inflation at 4.3 per cent for FY27, lower than the 4.7 per cent estimated in June. Core inflation, excluding precious metals, is projected to be lower, though it is likely to align with core inflation from the fourth quarter.
Although RBI governor Sanjay Malhotra, in his post policy interaction with media, pointed out that the headline CPI inflation is the RBI’s target, it seems that the central bank has been keeping a close tab on core inflation while deciding on the policy rate. If I am not mistaken, in the Malhotra regime at the RBI, core inflation is more discussed than in the past.
Incidentally, in the developed markets, central banks focus on core inflation. But in such markets, core inflation mostly converges with the headline inflation, which has not been the case in India. Apart from volatile oil prices, food prices play a role in the divergence. Till recently, food inflation had a 45.9 per cent weightage in the CPI inflation basket. In the new series, which kicked off early this year, the weightage has gone down to 36.8 per cent.
Meanwhile, post policy, the overnight index swap or OIS market is pricing in 2.5 rate hikes in the next 12 months. Before the policy, it was pricing in 3 hikes.
In this market, traders exchange a fixed interest rate for a floating rate tied to an overnight benchmark rate, creating a clear gauge of future monetary policy expectations.
The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book: Roller Coaster: An Affair with Banking. To read his previous columns, log on to www.bankerstrust.in. X: @TamalBandyo
 "Sanjay Malhotra, governor, RBI")