RBI MPC minutes signal wait-and-watch stance; rate hike odds shift to H2FY27: YES Bank

The possibility of a rate hike by the Reserve Bank of India (RBI) has been pushed further into the second half of FY27 as policymakers continue to prioritise growth while assessing evolving inflation risks, according to a report by YES Bank analysing the minutes of the June Monetary Policy Committee (MPC) meeting.

"The minutes of the June meeting indicate policymakers' dilemma around the question of 'to do or not to do'," YES Bank said in its Ecologue report. It added that inflation and growth risks appear to be "tilting both ways", keeping monetary policy in a state of flux amid the West Asia conflict and supply-side disruptions.

"Given the current understanding, rate hikes are likely to be pushed out to H2FY27 after assessing the impact of a weak southwest monsoon on food prices and its second-order effects," the report noted.

The RBI's MPC kept policy rates unchanged at 5.25% earlier this month while maintaining a neutral stance, citing heightened global uncertainties arising from the ongoing West Asia conflict, rising energy prices and supply chain disruptions.

Supply-side inflation concerns dominate

According to the YES Bank report, MPC members broadly viewed recent inflation pressures as supply-driven and refrained from advocating an immediate policy tightening cycle. Policymakers pointed to risks arising from elevated energy prices, supply chain disruptions, higher shipping costs, and uncertainties surrounding the southwest monsoon and El Niño conditions.

According to the RBI's assessment, a 10% increase in crude oil prices from the baseline could push headline inflation higher by around 50 basis points, assuming full pass-through. However, the global backdrop has changed considerably since the June policy review.

"The signing of a deal between the US and Iran has led Brent crude oil prices to fall below $80 per barrel, compared with around $88 per barrel ahead of the June policy," the report noted. The RBI's projections had assumed average crude oil prices of $95 per barrel.

With crude prices easing, YES Bank believes inflation could surprise on the downside in the coming quarters. "In Q3FY27, the RBI's own inflation projections are likely to be breached on the lower side," it said.

Several MPC members argued that monetary policy should not react aggressively to supply-led inflation shocks. External member Saugata Bhattacharya and Executive Director Indranil Bhattacharya observed that such shocks warrant a gradual policy response rather than immediate tightening.

RBI Deputy Governor Poonam Gupta also favoured caution, stating that the current situation does not justify a rate hike. She noted that "inflation is yet to become entrenched" and warned that tighter monetary policy could aggravate the impact of existing supply-side shocks.

Growth outlook remains supportive

On the growth front, MPC members acknowledged signs of moderation in some high-frequency indicators but remained optimistic about India's relative resilience. External member Ram Singh pointed out that manufacturing capacity utilisation stood at 75.2%, above its long-term average, and reiterated that his "preference remains growth-supportive".

The report said policymakers continue to draw comfort from robust services activity, support measures for MSMEs, resilient private consumption and healthy corporate balance sheets.

Given the evolving macroeconomic environment, YES Bank expects the RBI to remain data-dependent and avoid offering strong forward guidance.

"Policy-by-policy decision-making will be the order of the day," the report said, adding that there is "little merit in providing any forward guidance, especially through the stance."

However, the bank cautioned that risks remain. Southwest monsoon rainfall was running around 40% below the long-period average as of June 18, raising concerns over food inflation. The sustainability of the US-Iran understanding and the extent to which manufacturers pass on higher input costs to consumers also remain key variables.

"The thesis that monetary policy has a limited role in addressing supply-led inflation, until second-round effects become clearly visible, continues to feature in the discussions of the June MPC meeting," the report said.