HAWKISH SIGNALS, BUT NO RATE HIKE

HAWKISH SIGNALS, BUT NO RATE HIKE

The RBI policy presented by the RBI on June 05, 2026 kept rates on hold at 5.25%, while also keeping the stance of the policy at “Neutral.” However, the policy did cut the FY27 GDP growth forecast by 30 bps to 6.6% and raised inflation forecast by 50 bps to 5.1%. The RBI itself is projecting the FY27 inflation at 110 bps above the RBI long-term average.

In terms of two recent data points, the GDP growth for FY26 was impressive in real terms but less than impressive in nominal terms. The good real growth was more due to a low GDP deflator. However, the Current Account Deficit for FY26 came in at just 0.7% of GDP, implying that the pressure on the rupee will be limited. Rate action can focus on inflation!

One of the interesting insights into the RBI policy statement is available in the minutes, which is published by the RBI after 14 days. The minutes lays out the member-wise analysis of the current macro situation and the justification for their stand on rate action and the monetary stance. Here is a gist of the RBI MPC minutes of the June 2026 meeting.

NAGESH KUMAR WANTS SHIFT IN FOCUS TO FISCAL MEASURES

According to Dr Nagesh Kumar, the volatile situation in the Middle East had created a dilemma for the RBI. It had to control inflation but without impacting the growth engine. Hence, RBI has focused more on holding rates and watch the evolving situation in the Gulf. Nagesh Kumar also pointed out that the sharp fall in fiscal deficit from 6.5% to 4.4% of GDP, gives sufficient fiscal room to the government to boost growth via public spending and infrastructure capex. That should be the driving force, rather than monetary action.

The Vote: Nagesh Kumar was of the view that the current uncertainty called for a bigger role for fiscal measures than monetary measures. Hence “Wait and Watch” would be a good choice. Nagesh Kumar voted to hold rates at 5.25% and the policy stance as “Neutral.”

SAUGATA BHATTACHARYA SEES CLOUDED GROWTH-INFLATION TRADEOFF

Saugata Bhattacharya has underlined that the RBI projections of 5.1% inflation have factored the impact of fuel inflation as also the possible impact of El Nino on food inflation. Unless inflation got worse, it may not require any monetary action. On the capital account, he suggested more incentives for flows than raising rates at this point. According to Bhattacharya, growth estimates are persistently coming down and the current focus should be to boost nominal growth by keeping the cost of funds in the economy in check.

The Vote: Bhattacharya underlined that tight monetary conditions in India obviated the need for further rate hikes by the RBI at the current juncture. He voted to hold rates at 5.25% and to keep the monetary policy stance at “Neutral.”

RAM SINGH PREFERS A GROWTH-SUPPORTIVE POLICY

Prof Ram Singh underlined that while inflation remained a worry due to West Asia geopolitics, the real risk to India was losing the growth momentum. Hence, the focus of policy will have to be on sustaining the rate of GDP growth at a nominal level. With the full impact of West Asia and the El Nino not clear, it would be best for the RBI to retain policy flexibility, rather than trying to second-guess outcomes. Also, Ram Singh highlighted that his long-term preference for the tilt in monetary policy would be one that is growth-supportive.

The Vote: Ram Singh believes it is best for monetary policy to be flexible and act on data, rather than predict outcomes. He had changed his vote on stance from Accommodative to Neutral last time. He voted to hold rates at 5.25%, and the stance at “Neutral.”

INDRANIL BHATTACHARYA PREFERS TO WAIT AND WATCH

According to Dr Indranil Bhattacharya, there were too many X-factors. WPI inflation was sharply higher, but it is not clear if it will transmit into CPI inflation. Also, it is not clear if the El Nino effect would get mitigated by the Indian Ocean Diapole. Also, growth may have tapered, but is still showing a lot of resilience despite the supply chain constraints and the macro uncertainty. Hence, it may be too early to jump to a decision on rates. Instead, the RBI should retain its flexibility to act aggressively when the actual need arose.

The Vote: Indranil Bhattacharya feels that the current cost push inflation is best handled by supply-side measures than by raising rates. Accordingly, Bhattacharya voted to hold repo rates at 5.25% and to keep the stance at “Neutral.”

POONAM GUPTA SAYS, AVOID WORSENING THE SUPPLY SHOCK

According to Poonam Gupta, a rate hike at this juncture may or may not control inflation, but it would definitely hit the growth resilience shown by the Indian economy. Also, the entire outlook for inflation could change dramatically if the US-Iran peace deal actually works. For now, India has the policy leeway to control fuel inflation, which it is already doing. Any rate hike, would only worsen the supply side shock and is best avoided.

The Vote: According to Poonam Gupta, RBI should take a fresh look at inflation and growth projections in a post-war situation. That would allow for more rational analysis. She voted for holding repo rates at 5.25% and keeping the stance of the policy at “Neutral.”

RBI GOVERNOR WARNS AGAINST TOO MANY ASSUMPTIONS

RBI Governor pointed out that there were too many assumptions pertaining to the length of the conflict, its impact on oil prices, supply chain constraints etc. In the past, such estimates have often proved to be erroneous. Also, with core inflation still in check, any rate action cannot be dictated by the vagaries of food and fuel. Also, core inflation itself would be much lower, if precious metals were removed. While he did not need to vote, his preference was for status quo on rate and the stance.

The June 2026 monetary policy underline that the RBI is drawing a line between structural inflation and incremental inflation. For now, it is more of the latter. It is the former that could actually induce the RBI to hike rates. That is off the table for now!