Saugata Bhattacharya emphasises the need for flexibility in India’s monetary stance as inflation risks intensify, warning against premature rate hikes despite cautious signals from the RBI.
Saugata Bhattacharya has sought to temper market expectations that the Reserve Bank of India is already on a clear tightening path, even as he argued that the August policy setting may need to be reconsidered if inflation broadens further.
In an interview with Business Standard, the Reserve Bank of India monetary policy committee member said the decision to leave the repo rate unchanged at 5.25% on August 5 was based on the balance between the cost of acting too soon and the risk of allowing inflation to become entrenched. He said the committee should watch for two more inflation readings and an update on first-quarter gross domestic product before deciding whether price pressures are becoming more persistent. Bhattacharya also noted that the MPC’s forecast of headline consumer price inflation averaging 5% in FY27, with a rise to 5.9% in the third quarter, should prompt a fresh look at whether the policy rate remains appropriate. Reuters-style reporting on the August review showed the RBI kept its neutral stance while leaving the standing deposit facility rate at 5%, the marginal standing facility rate and bank rate at 5.5%, with Governor Sanjay Malhotra saying underlying inflation remained contained.
Bhattacharya pushed back against the idea that the minutes should be read as a signal of an imminent rate-hike cycle. He said there was “nothing sacrosanct” about the sequence in which stance and rate changes occur, but added that moving away from neutral would imply a stronger commitment to tighter policy. He said the central bank still had room to react to incoming data and refused to set out a fixed path for rates, noting that growth remains resilient, tax collections are holding up and demand momentum is still visible.
He also questioned whether the current policy rate is now slightly too accommodative for the inflation outlook. Bhattacharya said real interest rates can be useful as a signal, but only as a theoretical guide because estimates of the neutral rate vary with the economic cycle. In his view, a steady-state reference point built on the 90-day Treasury bill would place the repo rate somewhat below that risk-free benchmark, suggesting scope for a higher setting if price pressures become more widespread. SBI Research has also said the MPC minutes carried a more hawkish tone than the governor’s public remarks, underlining the split in the RBI’s communication.
On the broader economy, Bhattacharya said credit growth above 18% points to healthy activity, with private investment improving, capacity use rising and lending spreading across sectors and company sizes. He said overheating remains limited for now, though slack in the system could disappear quickly if inflation gains breadth. He pointed to the July consumer price index readings, released after the August meeting, as showing signs that core price pressures may be widening. Separate RBI minutes reported by Business Standard said strong foreign inflows, including FCNR(B) deposits and portfolio flows into the bond market, should support rupee stability and ease imported inflation, adding another factor the MPC will weigh before its next review.
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