RBI MPC member flags adverse shift in growth-inflation balance, warns of rising policy risks amid global uncertainty and persistent inflation expectations
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Saugata Bhattacharya, an external member of the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC)
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Saugata Bhattacharya, an external member of the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) says risks of a policy mistake have become heightened, and future actions need to be calibrated carefully, in an email interview to Manojit Saha. Edited excerpts:
Do you think the rate cut cycle is over and rates can only rise from here?
My comments are my own opinions, not those of the MPC.
Given the present heightened uncertainty, it is impossible to predict or have a pre-committed path, or need, for future repo rate actions. These decisions have to be taken on a meeting-by-meeting basis, based on interpretations of incoming data.
Without doubt, the growth – inflation trade-off, in the broader context of the evolving domestic macro-financial conditions, is now likely to have shifted adversely – at least for the near term – compared to the macroeconomic environment at the February 2026 MPC review. Policy judgements rely on a broad spectrum of the RBI’s rigorous analytical frameworks and comprehensive surveys. They are supplemented by external inputs like responses of the Survey of Professional Forecasters and others, multiple external stakeholder feedback, including global central banks’ communications, and other inputs.
Risks of a policy mistake have become heightened, and future actions need to be calibrated carefully.
In the minutes, you said inflation expectations signal risks of rising inflation which is ‘more worrying’. Do you think the situation has worsened in the last 15 days?
Obviously, latent inflationary pressures have become a concern. How these translate into realised inflation and then feed into inflationary expectations, and thereafter, via wage negotiations and indexations into labour costs, is a real concern.
The Monetary Policy Report (MPR) has extensively documented household and enterprise inflation expectations. These are supplemented by private surveys, like the IIM-Ahmedabad Business Inflation Expectations Survey and the Purchasing Manager Index (PMI). Each one is signalling higher household and enterprise inflation expectations over various time horizons.
Based on your comments, is it correct to assume you are more concerned about inflation than growth?
No. I refer to “more worrying” in terms of inflation expectations, not inflation per se. The MPC forecasts have factored in adverse impacts on both growth and inflation. However, extrapolations of the growth inflation trade-off are not linear. A prolonged West Asia supply chain disruption can have very unpredictable consequences.
The adverse impacts on aggregate demand are difficult to quantify, since a large part of these are likely to originate from the micro and small enterprises and the informal sector.
These will result mostly not from higher input costs but physical shortages. Media has reported extensively on the effects in various fuels-intensive manufacturing clusters. It will be difficult to estimate the effects of shutdowns or reduced output. These will be only be measured in the next round of the Annual Survey of Unincorporated Enterprises (ASUSE).
Loss of incomes will gradually show up in fast-moving consumer goods (FMCG) and other consumer non-durables. We have also read about the reverse migration of labour to their home destinations. How all of this translates into consumer prices remains to be seen.
In addition, how much of higher input costs and raw materials are absorbed by energy retailers (and others who use petroproducts as inputs) remains to be seen. Ultimately, inflation pass-throughs will be determined by the quantum of higher input costs each stakeholder in the supply chain is able to absorb.
The role of the fiscal balance sheet as a shock absorber is central to this transmission.
Hence, over a period of time, the effects of the logistics shocks on both, via complex second and third order channels, inflation and growth need to be closely monitored.
For the first time, the RBI released a core inflation projection of 4.4 per cent for FY27. Does that give you some comfort on the inflation front?
I concur with the MPC decision to release core inflation forecast. I believe that an expanded set of forecasts, overall, contributes to better communicating to stakeholders about the underlying MPC deliberations regarding monetary policy actions, including all the inherent complexities.
The RBI research has extensively analysed the spillovers from food and fuels to core inflation, which helps guide policy discussions. A more granular understanding of the spillovers from crude oil prices and other downstream petrochem products to the broader supply chains of manufacturing, using, for example, supply use tables, will provide us an even better understanding of the inflation transmission dynamics.
In addition, economists also monitor the concept of “underlying” inflation, depending on their preferred metrics of choice, which measures demand-led CPI components. This metric has been a comfort zone, since I cannot yet detect any signs of overheating in the economy.
Was currency depreciation a consideration for the MPC decision?
The rupee exchange rate is beyond the scope of the MPC. However, the underlying dynamics of the balance of payments, global economic conditions, including capital allocations, and major central banks’ actions, remains a significant part of the discussions.
The external environment, for me, remains a source of concern, as I have been at pains to emphasise over the last few reviews.
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