The Reserve Bank of India-led monetary policy committee (MPC) members have signaled they would back an interest rate hike if inflationary pressures don’t improve and oil prices continue to climb.

RBI Governor Sanjay Malhotra said policy tightening would be necessary if the risks of higher food, fuel and other input prices translating into a broad-based increase in inflation and de-anchoring of expectations persist. 

“Any evidence of these risks materialising may need policy tightening,” he stated, according to minutes of the MPC meeting released by the RBI on Wednesday.

Malhotra, however, preferred to wait for more certainty to emerge on the persistence of elevated prices for any recalibration of the policy rate. In the August policy, he kept the repo rate unchanged at 5.25% for the fourth consecutive time while retaining the neutral stance.

The minutes of the 62nd meeting, held between 3-5 August, suggested that other members of the MPC would support raising rates if the environment continues to be highly uncertain. 

RBI deputy governor Poonam Gupta stressed on persistent uncertainty on account of global developments, weather-related risks and oil prices, which she expected to average about $90 per barrel during the year.

“The scope for any further easing does not seem to exist at the current juncture. Instead, given that the headline inflation is projected to peak to a level as high as 5.9% in Q3 2026-27, a case for a hike may emerge during the course of the year,” she said.

MPC member Prof Ram Singh also favoured a rate increase if the strains become more visible and inflation-related risks – El Nino’s effects on food inflation and global oil prices – go unresolved. “High uncertainty still looms over several key monetary policy indicators…If external shocks worsen or the second-round price effects spread widely, we should be able to swiftly adjust policy to protect macroeconomic stability,” he said.

MPC member Saugata Bhattacharya expressed a word of caution on inflation as he felt that the persistence of high fuel prices would likely feed into second round inflation and result in pass throughs of higher input costs to consumer prices. Inflation risks might then become tilted to the upside. 

A close monitoring of the growth-inflation dynamics is warranted for the appropriate time to recalibrate the policy rate, Bhattacharya said. “I judge it appropriate to await evidence of a further pickup in aggregate demand and generalisation of price pressures before taking the next policy action. Another factor which needs to be tracked are the levels of real interest rates,” he cautioned.

According to MPC member Indranil Bhattacharyya, intermittent geopolitical shocks are fuelling sharp but volatile two-way movements in global oil prices blurring the near-term outlook. The confluence of both these factors can precipitate sustained food and fuel shocks that can deeply get entrenched resulting in generalisation of inflation. 

The emphasis, he stated, shifts from one baseline rate path to how policy would respond under different economic conditions. On this count, a pause preserves flexibility on timing; it does not necessarily imply an extended pause.  

“The shift in the distribution towards higher inflation numbers warrants a careful vigil. One must look out for the extent of generalisation and risk of inflation expectations getting unanchored before contemplating any rate hike,” he said.

While the MPC members have supported no repo rate change in the August policy, they have vouched for a cautious approach in future. Dr Nagesh Kumar has said there was need to “be extremely cautious” in a “highly uncertain economic environment” and to “be watchful of the emerging geopolitical, trade policy and monsoon-related trends and their effect on India’s economic outlook”.

Voting for status quo on the repo rate, the members, according to the minutes, felt that at the current juncture there did not seem to be a case for a monetary policy action. The August policy reflected a wait-and-watch approach while the RBI revised upwards the GDP growth projection for FY27 by 10 basis points to 6.7% and cut inflation forecast by 10 basis points to 5%.

“The best course of action would be to wait and watch a bit more. This would allow for the weather-related uncertainties to fully settle; to ascertain how far the supply side inflation is getting entrenched; and to get some more clarity on the global front,” said Gupta, while signalling that the future course of policy action should be data dependent.

The minutes noted the growth-inflation dynamics was more or less similar to that in the last policy meeting.

“Despite the conflict in West Asia disrupting supply chains, heightened uncertainty and an erratic monsoon so far, the Indian economy has performed better than expected in Q1 of FY27. It is expected to remain resilient going ahead.  A growth of 6.7%, as projected for this financial year, is robust, given the headwinds. Inflation is inching up but is expected to peak in Q3 before moderating,”  Malhotra said, adding that the shock does not call for a monetary response to curtail demand as of now.