RBI signals a wait-and-see approach amid focus on core inflation in Indian markets

The Reserve Bank of India’s emphasis on core inflation over headline figures has left markets uncertain about future rate hikes, signalling a potential pause as the central bank awaits clearer inflation trends.

Indian markets are trying to interpret a signal from the Reserve Bank of India that may be softer on the surface than it sounds. Murthy Nagarajan, head of fixed income at Tata Asset Management, said investors have been left uncertain after the central bank’s latest policy language suggested a sharper focus on core inflation, meaning prices excluding food, fuel and precious metals, even as officials continued to speak publicly about headline inflation. According to Nagarajan, that shift matters because it changes how the market reads the RBI’s next move.

Nagarajan told Siddharth Upasani that the tone of the policy surprised investors who had been expecting a more accommodative stance. He said the RBI appears to be buying time while it waits for greater clarity on inflation, growth and external risks. In his view, the central bank is effectively leaning on core inflation because headline readings remain clouded by food prices, oil, weather and war-related uncertainty. He argued that if inflation stays above 5% for several quarters, the RBI may eventually have to tighten, but not immediately.

That reading also fits with the RBI’s broader recent policy approach. In December 2023, the Monetary Policy Committee left the repo rate unchanged at 6.5% and kept its inflation forecast at 5.4% for 2023-24, while stressing the need to watch food inflation closely. A separate explanation published later noted that the RBI’s emphasis on core inflation is intended to capture underlying demand pressures in services and manufactured goods rather than temporary swings in food and fuel.

Nagarajan said the central bank has room to wait because the economy is still showing resilience and liquidity conditions are comfortable. He pointed to strong foreign portfolio debt inflows and the prospect of foreign currency non-resident deposits rising further. He also suggested the RBI could use liquidity management to restrain money supply before changing rates, if inflation worsens. On his timeline, the first repo-rate increase may not come until December, with any further moves depending on growth, inflation and the outlook for commodity prices.

He also said a delay in Bloomberg’s planned inclusion of Indian government bonds in its global index is likely temporary, not a rejection. Bloomberg has asked for more time, and one theory circulating in markets is that it wants offshore settlement through platforms such as Euroclear, something the Indian government is reluctant to permit. Still, Nagarajan said India’s place in other major bond benchmarks makes full exclusion from Bloomberg’s index difficult to imagine, and he expects inclusion could happen within six to 12 months.