Mumbai: All six members of the RBI’s Monetary Policy Committee favoured a wait-and-watch approach as they voted for a status quo on benchmark interest rates earlier this month, citing high uncertainty over the trajectory of inflation and growth prospects due to the West Asia conflict, according to the minutes of the MPC meeting released on Friday.
The MPC meeting was held during June 3-5.
Governor Sanjay Malhotra, who chairs the committee, as well as the five other members voted to keep the benchmark interest rates unchanged at 5.25 per cent.
During the meeting, Malhotra opined there was high uncertainty in the assumptions made for projections of both inflation and growth on account of reasons such as the duration of the West Asia conflict and the disruption in supply chains, the intensity and geographical spread of monsoon rains and their impact on energy, food and other commodity prices.
“I would prefer to adopt a wait-and-watch approach,” he said.
The minutes showed RBI Deputy Governor Poonam Gupta too felt the need to wait a bit more for global as well as weather-related uncertainties to play out over the coming months, before taking a call on whether and when to reverse the policy cycle.
“This is for two reasons. First, at the current juncture, with growth projected to decelerate and inflation yet to become entrenched, I do not see a case for policy tightening to rein in inflation or inflationary expectations. If anything, it could make the economic pain of the ongoing supply shock sharper,” she said.
Secondly, Gupta said that once the West Asia conflict is resolved, the outlook, both for India as well as globally, could improve rapidly warranting a fresh look at the inflation-growth dynamics.
“Therefore, it would be prudent to adopt a wait and watch approach rather than make an early or preemptive policy pivot,” she added.
In April too, the MPC had kept the key policy rate unchanged.
At the June meeting, RBI Executive Director Indranil Bhattacharyya said inflation projections are subject to several uncertainties in the present context. While WPI inflation has spiked, one needs to wait for its pass-through to CPI inflation, he said, and added the spatial and temporal distribution of monsoon, which is critical for crop outlook, is not yet known.
Further, Bhattacharyya said that while demand-pull inflation may call for pre-emptive action to effectively anchor inflation expectations, cost-push inflation induced by supply shocks warrants greater caution – gradualism – in policy making.
“In view of these factors, I feel it is prudent to wait for greater clarity to emerge from the data before deciding on any policy action. Accordingly, I vote for a pause on the policy rate while retaining the neutral stance,” he said.
The MPC has three members from the RBI while three external members are appointed by the government. The three external members are Institute for Studies in Industrial Development Director and Chief Executive Nagesh Kumar, economist Saugata Bhattacharya and Delhi School of Economics Director Ram Singh.
According to the minutes, Kumar was of the view that notwithstanding the factors that make the Indian economy better equipped to withstand the current shock than the previous ones, the economic outlook has been adversely affected.
Growth and inflation projections are obviously subject to a lot of uncertainties surrounding the duration of the West Asia conflict, he said.
In the highly uncertain current economic environment, he said prudence requires waiting for greater clarity to emerge on the impact before any monetary policy response.
“One needs to keep an eye on the evolving geopolitical situation in West Asia and its implications for the Indian macroeconomic outlook, especially the growth-inflation dynamics,” Kumar said as he voted for the status quo on the repo rate and supported maintaining the neutral stance.
Saugata Bhattacharya said that given the multiple overlapping geo-economic shocks clouding the future, “I believe that risk management is now the most sensible approach to monetary policy responses; this has now been articulated by multiple central banks and academic research”.
The chances of a policy mistake remain heightened given the two-way risks on the inflation-growth outlook, he said.
“However, given the MPC forecasts on growth and inflation, and factoring in the elevated and rising inflation expectations, we must now closely monitor second order input cost transmission getting embedded in retail inflation. This will depend on the intensity and duration of the energy shock,” the external member said.
Ram Singh said as long as the West Asia conflict persists and the impact of El Nino remains unquantified, it makes sense for the monetary policy to retain all the flexibility needed to respond to evolving inflation and growth trajectories.
“A ‘neutral’ stance provides the MPC with maximum operational flexibility without being constrained by previous commitments. If external shocks worsen or the second-round price effects spread widely, the neutral stance allows us to adjust policy to protect macroeconomic stability,” he said.
On June 5, the central bank cautioned that rising costs could spill over into wages and inflation expectations. It also cited risks from a below-normal monsoon forecast and possible El Nino conditions, which could put pressure on food prices in the months ahead.
RBI lowered its growth expectations for the current fiscal, projecting real GDP growth at 6.6 per cent in 2026-27, below the 6.9 per cent forecast in April. The projection is also lower than 7.6 per cent estimated for 2025-26. It also forecast inflation to rise to 5.1 per cent in 2026-27.
Earlier this month, the MPC kept the repo rate unchanged at 5.25 per cent and also announced several measures to attract foreign capital and support the rupee amid growing risks to growth and inflationary pressure from the prolonged West Asia conflict.
