Inflation risks overshadow 7.8% growth as MPC raises repo rate; majority favours

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Supply shocks and strong demand push MPC towards pre-emptive rate action

By BL Mumbai Bureau

Updated - October 21, 2026 at 09:15 PM.

Members warn of persistent price pressures from crude oil, food and demand despite resilient economic growth | Photo Credit: FRANCIS MASCARENHAS

While acknowledging the economy’s robust performance, with GDP expanding 7.8 per cent in the first quarter of FY27, all six members of the Monetary Policy Committee (MPC) flagged mounting inflationary risks, prompting a unanimous decision to raise the repo rate by 25 basis points to 5.50 per cent from 5.25 per cent.

According to the minutes of the MPC’s three-day meeting held from October 5-7, only two members, Nagesh Kumar, Director and Chief Executive of the Institute for Studies in Industrial Development, and Ram Singh, Director of the Delhi School of Economics, favoured retaining the policy stance at neutral. The other four MPC members preferred to change the stance to calibrated tightening.

Inflation Risks

RBI Governor Sanjay Malhotra observed that amidst the turbulent global backdrop, the Indian economy has shown remarkable resilience. Inflationary pressures are, however, building up.

“As regards supply side inflation requiring a monetary policy response, it is pertinent to mention that monetary policy primarily acts by curtailing second round effects (wage expectations and firm level pricing behaviour) of a supply shock.

“It is difficult to distinguish between the second-round effects and the indirect impact of supply-side pressures (in production costs through energy and other inputs) as both are present in core inflation,” he said.

Similarly, there are risks of demand-side pressures in view of the growth in monetary and credit aggregates. Considering the above growth-inflation dynamics, the Governor said it is appropriate to recalibrate the policy rate.

Supply Shocks

Poonam Gupta, Deputy Governor, RBI, underscored that at this point, inflation is mostly driven by external supply-side shocks, with insignificant signs of it becoming entrenched or impacting inflation expectations.

“Yet, with projections indicating the likelihood of headline inflation hitting the upper tolerance limit of 6 per cent, one may not want to wait for more definitive evidence of generalisation, and instead be mindful of the fact that monetary policy works with a lag.

“...Rather than waiting any longer, in view of rising inflation and resilient growth, I favour raising the policy repo rate by 25 bps in this policy,” Gupta said.

The Deputy Governor noted that domestically, weather-related adversities and global oil and commodity prices may continue to put upward pressure on headline inflation. At some point, a larger pass-through of input costs to output prices may materialise.

Under these circumstances, it is conceivable that a further increase in the policy rate might be needed to keep inflation low and inflationary expectations anchored, she added.

Indranil Bhattacharyya, Executive Director, RBI, said the inflation outlook merits greater attention, given supply-side pressures from crude and food prices are unlikely to relent quickly.

He opined that:“With demand holding strong and in the wake of strong growth in monetary and credit aggregates, the interplay of both supply and demand factors could ratchet up inflation pressures significantly in the period ahead. Therefore, I feel it is better to set aside the “cautiousness bias” and act in a pre-emptive manner at this juncture rather than wait and watch.”

Nagesh Kumar, Director and Chief Executive of the Delhi-based Institute for Studies in Industrial Development, emphasised that while the 7.8 per cent GDP growth logged by the Indian economy in Q1:FY2027 is impressive, highlighting its resilience, the inflationary outlook remains challenging due to a combination of factors, including the deficient monsoon, rising crude oil prices, precious metals prices remaining at elevated levels, and exchange rate depreciation.

He opined that while inflation is driven largely by supply-side factors and does not show any signs of overheating of the economy nor of generalisation, it is important to manage inflationary expectations.

Saugata Bhattacharya, Mumbai-based economist, said that since the August 2026 review, some of the upside risks to inflation have started materialising. Further, data increasingly suggest that price pressures are getting entrenched in the economic system. Input prices, recorded in Wholesale Price Indices, have been printing close to 9 per cent year-on-year.

He observed that maintaining a certain gap between India and G7 interest rates is important for attracting debt capital flows. At the same time, too rapid a policy rate adjustment risks constricting growth and hence growth-led capital flows.

The Economist noted that inflation risks and financial markets suggest the broad monetary policy environment in India is too accommodative.

“Growth is resilient enough to permit a closer focus on incipient inflation persistence. The current and forecast levels of real interest rates do not seem consistent with the levels required to ensure price stability.

“Hence, the totality of information indicates a strong economic case at this time for tightening monetary policy, to bring inflation closer to the target sooner rather than later and anchor inflation expectations,” he said.

Ram Singh, Director, Delhi School of Economics, said domestic inflation and its near-term trajectory have turned less benign. Moreover, evidence suggests inflation has generalised beyond the direct effects of fuel, energy, and commodity prices since the onset of the West Asia conflict. Emerging evidence points to indirect effects (firms passing these cost increases onto the prices of the goods and services they provide).

He noted that headline CPI inflation is expected to remain elevated, averaging almost 5.8 per cent over the next three quarters, nudging the upper limit of the FIT (flexible inflation targetting framework) tolerance band. Additionally, at the current repo rate level, the projected inflation trajectory will render the real rate negative, generating a perverse saving-consumption trade-off

“To realign the inflation trajectory towards the target, and from the real repo rate perspective, a calibrated increase in the repo rate is needed. The duration and magnitude of the rate hike required to meet these objectives would depend on the emerging growth-inflation outlook.

“The MPC will have to remain vigilant about the pace of inflation generalisation to respond in a timely and effective way. For now, there is a case for incremental, mild repo rate hikes, not high-for-long rates,” Singh said.

Published on October 21, 2026

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