Reserve Bank of India (RBI) Governor Sanjay Malhotra, while announcing the unanimous monetary policy committee (MPC) decision on rates, noted that the current risks to inflation remain primarily a function of supply-side constraints and are not broad based.
The RBI eased its FY27 forecast for consumer price inflation to 5%, down from the 5.1% projected in June, and raised full-year growth projections to 6.7% from 6.6%, anticipating front-loaded economic momentum.
At the same time, Governor Malhotra underscored risks stemming from geopolitical uncertainty and patchy monsoons, even though immediate odds seem rather long on a broad-based pricing spiral.
“Although generalised inflation pressures continue to remain modest so far, the risks of second-round impact of higher food, fuel and other input prices translating to broad-based inflation persist,” Malhotra said.
The policy decision was in line with market expectations. An ET poll of 12 economists, published on August 3, showed participants expected the RBI to maintain a status quo on rates and a neutral stance.
Lower inflation expectations come amid a rapid retreat in oil prices below $80 a barrel.Inflation, Growth
The RBI now pegs second quarter inflation at 4.7%, down from the 5.1% projected earlier. It raised growth projections on a likely strong showing in the first and second quarters. Growth is expected to be better at 7% in the first quarter ended June versus 6.6% projected earlier and at 6.4% in the second quarter ended September from 6.3% projected earlier.
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Sustained momentum in services, continuing impact of GST rationalisation, and broadly stable employment conditions should continue to support urban demand. Strong capacity utilisation, robust credit flow and the government’s continued thrust on infrastructure are expected to sustain investment activity.
Yields on the 10-year benchmark government bond rallied four basis points, and were at 6.77%, versus the previous close of 6.81%.
One basis point is a hundredth of a percentage point.
Equity markets were little changed after the policy announcement. The Nifty was up 0.15% at 24,653, while the BSE Sensex was up 0.50% to 78,882. The Indian rupee rose to its highest level in a month on Wednesday, opening at 95.08, versus its previous close of 95.37 per dollar.
The MPC said a turbulent global economic environment is likely to have some bearing on domestic economic activity.
Potential Risks
“Energy prices and supply chain pressures remain elevated and uncertain. The adverse impact is being contained with various supply side measures,” the committee said. “Even though the situation is still evolving, deficient and uneven south-west monsoon amidst El Niño conditions poses some risks to the agriculture sector’s outlook and rural demand.”
Malhotra said moderation in global trade growth, surge in energy prices and persistent trade policy uncertainties pose upside risks to India’s current account deficit in 2026-27.
“On the other hand, implementation of the India-UK trade deal along with other recent agreements with major trading partners, healthy services exports and buoyant inward remittances are expected to mitigate these risks,” he said.
Malhotra said global economic conditions and sentiments continue to remain hostage to the rapidly oscillating developments of the West Asia conflict but the stronger macroeconomic fundamentals of the Indian economy are helping navigate this global shock resolutely.
“We shall continue to implement policies that further fortify our economy. Whether it is facilitating sustainable growth or promoting consumer protection; whether it is preserving stability of prices, the financial system or the currency, we will do whatever it takes to ensure the same,” Malhotra said.