While the decision to leave the policy rate and stance unchanged was widely anticipated, the accompanying commentary suggested a central bank that remains comfortable with the inflation outlook and sees little reason to alter the current policy setting. That comfort may soon become misplaced — not because today’s inflation print demands it, but because the current setting is quietly building the conditions for tomorrow’s. The odds are not stacked in favour of a long pause.
The case for patience, on its own terms. The RBI’s assessment is not unreasonable. The pass-through of higher energy costs to retail inflation has stayed limited, and core inflation — a measure of demand side pressures in the economy — continues to run below 4 per cent. The central bank expects headline inflation to peak next quarter before easing and pointed out that the recent rise partly must be seen as a normalisation trend given a low base from last year. On the numbers in front of it today, there is no broad-based price problem.
But the RBI’s own projections undercut the comfort it is taking from them. By its estimate, inflation is expected to average above 5 per cent over the next three quarters — not a one-off spike, but a sustained run above its median target. Treating that as a supply shock to be looked through, rather than a trajectory to be leaned against, is where the policy debate should be focused.
So, the question to ask is whether the current policy setting is becoming more accommodative than the macroeconomic backdrop even requires. The simplest way to see this is through expected real policy rates. With one-year-ahead inflation projected at roughly 5.3 per cent against a repo rate of 5.25 per cent, the expected real policy rate is likely to drift near zero. Estimates of India’s neutral real rate cluster around 1.4 per cent and 1.9 per cent — they signal the real rate at which output is stable and monetary policy is neither expansionary nor contractionary. Unless India’s equilibrium growth rate has fallen sharply — and nothing in the data suggests it has — monetary policy today is operating as accommodative in substance if not in name.
Ordinarily, an accommodative setting would be the right prescription for an economy struggling to find momentum. India is not that economy. Growth has surprised to the upside despite global uncertainty; spillovers from the West Asia conflict have been more contained than feared; and the RBI has itself revised FY27 growth higher, to 6.7 per cent. High-frequency indicators point to sustained momentum, not a slowdown. Infact, growth in the first quarter of this year could come in well above 7 per cent.
This changes the debate. That combination — strong growth, near-zero future real rates, and inflation projected to run above
5 per cent— is unlikely to remain free of broader demand side pressures for long. As capacity utilisation tightens and firms grow more confident in demand, pricing power strengthens and cost pass-through becomes easier, not harder. Wholesale prices are already showing those pipeline pressures. Moreover, food inflation risk remains tilted upward this year, and food shocks have a track record of bleeding into broader inflation expectations well beyond food itself.
Domestic policy should be anchored in domestic conditions, and the RBI is right not to chase or react to global rate shifts mechanically. But it cannot be fully insulated from them either. As global real rates begin to rise, narrowing differentials will increasingly weigh on capital flows, the currency, and imported inflation.
The global inflation backdrop itself is also less benign than it looked a year ago. China’s weak domestic demand has been a disinflationary force on traded goods, but that impulse is becoming less dominant. Rising energy prices, deepening trade fragmentation, and the AI investment cycle are starting to push the other way: demand for advanced semiconductors and memory has tightened supply and pulled manufacturing capacity toward higher-value AI applications. As a result, electronics — historically one of the most reliable sources of global goods disinflation — are no longer pulling global prices down the way they have for the past two years. That removes a tailwind India’s low-core inflation years have in part benefited from.
The risk over the coming quarters is not just that today’s supply-side inflation shock persists, but that it quietly turns into a demand-driven one inside a loose monetary policy setting. That argues for the RBI moving ahead of the curve in subsequent meetings — shifting from neutral to withdrawal of accommodation before the data forces its hand, not after.
Bottom line is that the story may no longer be “lower for longer” — instead the calm before higher rates.
The author is principal economist at HDFC Bank
 "RBI, Reserve Bank of India")