MPC Minutes Break Dovish Policy Read as Members Flag Rate-Hike Risks

The minutes of the Reserve Bank of India’s August Monetary Policy Committee have challenged the market’s dovish reading of the policy decision, with members flagging rising inflation risks and the possibility of rate hikes even as the central bank kept the repo rate unchanged at 5.25% and lowered its inflation forecast. 

The August policy had been perceived as dovish after the RBI retained the policy rate and cut its 2026-27 inflation forecast, reinforcing expectations that the policy could remain supportive of growth. The minutes released today, however, show that members remain alert to the possibility of inflation pressures becoming persistent, suggesting that the policy pause should not be read as an assurance of prolonged accommodation.

The clearest signal came from Deputy Governor Poonam Gupta, who said the scope for further easing “does not seem to exist at the current juncture” and that a case for a rate hike could emerge during the year as headline inflation is projected to peak at 5.9% in October-December.

Gupta nevertheless backed a wait-and-watch approach, saying the MPC should assess how far supply-side inflation becomes entrenched and seek greater clarity on global and weather-related risks before taking a policy call.

Governor Sanjay Malhotra also kept the tightening option open, stressing the need to watch whether higher food, fuel and input costs become broad-based or lead to a de-anchoring of inflation expectations. While he did not see current conditions as warranting immediate policy action, his comments underline that the lower inflation forecast does not eliminate upside risks.

Saugata Bhattacharya also struck a cautious note, highlighting the two-way risks to the inflation-growth outlook. He said the cost of tightening too early had to be weighed against the risk of allowing inflation to become persistent, which could eventually require a more aggressive policy response. He also stressed the importance of monitoring real interest rates.

Bhattacharya favoured waiting for clearer evidence of stronger aggregate demand and a broader generalisation of price pressures before changing the policy rate. His assessment suggests that the current pause reflects risk management rather than a firm commitment to continued easing.

Indranil Bhattacharyya similarly stressed that the August pause should not be interpreted as an extended pause. He argued that the MPC should wait for inflation risks to show up in actual CPI prints, while remaining vigilant to a broadening of price pressures across components.

Ram Singh also highlighted second-round inflation risks and the role of real interest rates. While he saw no signs of economic overheating, he noted that headline inflation could remain elevated for several quarters and said incoming data would be crucial for policy decisions.

The minutes provide a more nuanced picture than the August policy statement alone. While the lower inflation forecast and unchanged repo rate and stance initially reinforced a dovish market interpretation, the minutes show that several MPC members are already considering the conditions under which policy tightening could become necessary.