Monetary Policy Committee (MPC) voted unanimously to raise repo rate by 25 bps to 5.5 percent. RBI sees a broadening of inflation pressures though assessing that it is still supply-driven rather than due to demand side pressures. The stance was changed to ‘calibrated tightening’ to signal rate cuts are off the table and that adjustments would be measured with due consideration to the evolving conditions. RBI sees the price pressures broadening while it still is predominantly supply-led, rather than being demand-led.
Importantly RBI now looks not only at the headline CPI, but the core inflation is also under consideration for decision making. CPI excluding food, fuel and precious metals has consistently moved up from the beginning of the FY27 when it was at 2.2 percent to record at 2.9 percent in August, thus providing evidence of a broadening inflation pressure from the core side. Further, the latest Household Inflation Expectations survey indicated a further tightening of both 3-month and 1-year ahead expectations.
The assessment on the inflation dynamics is that pressure will continue from the supply side while the inflation projections for FY27 average have been increased by 20 bps to 5.2 percent with Q3 and Q4 inflation forecasts increased by 10 and 20 bps respectively to 6 percent and 5.7 percent. Q1FY28 forecast is also revised sharply higher to 5.6 percent from 5.3 percent earlier.
Supporting the inflation forecast changes (as indicated by the Monetary Policy Report (MPR) was the alteration to the base case assumptions on oil and currency. In the April MPR, oil was assumed at US$85 a barrel for FY27 and US$75 a barrel for FY28. This has been raised by US$10 a barrel for both. USD/INR was being assumed at an average of 94 and has been changed to 95 now for FY27.
However, even as the base case assumptions for oil were adverse, FY27 GDP estimate was increased to 7.1 percent from 6.7 percent earlier, providing the platform for the RBI to push the pedal on rates without worrying too much about growth sacrifice.