RBI faces 'chalk and cheese' dilemma on rate hike amid weak monsoon: SBI Research

SBI Research has flagged a growing dilemma for monetary policy, saying a possible rate hike by the Reserve Bank may be difficult to reconcile with worsening monsoon conditions and the need for fiscal support to the rural economy.

In its latest Ecowrap report, SBI Research said the RBI's recent monetary policy minutes have retained a hawkish undertone, while Governor Sanjay Malhotra's statement sounded more dovish, data-dependent and focused on a "wait-and-watch" approach.

The Monetary Policy Committee (MPC) meeting minutes released on Wednesday showed that the panel broadly agreed that rising food and fuel prices posed inflation risks, but there was limited evidence of broad-based price pressures, warranting a wait-and-watch approach.

"The policy dilemma for markets is therefore increasingly a 'chalk or cheese' problem," the report said, referring to the divergence between the tone of the MPC minutes and the Governor's communication.

SBI Research's analysis found that the divergence was particularly pronounced on "policy and rates" and "inflation and prices".

While the minutes attach greater weight to risks relevant to the future rate trajectory, the Governor's communication gives relatively greater weight to growth and financial conditions.

The report said the window for a rate hike has opened, but any such decision remains in a "delicate balance", primarily because of global and domestic factors.

SBI Research said the US economy continues to show resilience, driven by consumer spending and artificial intelligence investment, but faces downside risks from cooling employment and an unsustainable debt trajectory.

It noted that US national debt has crossed USD 40 trillion, with annual interest payments approaching USD 1.2 trillion.

The US Treasury has doubled its buyback of longer-dated securities to USD 4 billion per operation from September 9, with the aim of supporting bond prices and easing pressure on long-term yields.

SBI Research said a US rate hike in September looks unlikely, arguing that a bond buyback programme and a rate hike are "mutually incongruous".

The report pointed to the upcoming Jackson Hole meeting, scheduled for August 27-29, where markets will look for signals on the Federal Reserve's rate path.

The research report also highlighted the uneven progress of the 2026 monsoon in the country.

Although the nationwide rainfall shortfall is around 13%, several major foodgrain-producing states are facing substantial deficits.

As of August 21, Bihar had a 41% rainfall deficit, followed by Andhra Pradesh at 39%, Punjab at 32% and Karnataka at 22%.

Out of 741 districts, 351 had received deficient or large-deficient rainfall, it said.

Skymet had revised its monsoon forecast downward to 85% of the long-period average from 94% earlier, with a 70% probability of drought.

The report expects CPI inflation at 4.7% in August and said inflation could "just" breach 6% in October and November before easing to around 5% in the fourth quarter of 2026-27.

SBI Research argued that addressing monsoon-related risks through rural policy support may be more appropriate than monetary tightening.

It pointed to data showing a sharp decline in person-days generated under the newly introduced VB-G RAM G rural employment programme.

The report said person-days generated in July and August 2026 were down about 60% from the corresponding period under MGNREGA in 2025.

The programme generated 8.99 crore person-days in July against 17.65 crore under MGNREGA a year earlier, while August data up to August 20 stood at 2.85 crore against 12.12 crore, the report said.

However, SBI Research noted that it is too early to draw firm conclusions from the decline, citing the transition to the new scheme, administrative readiness and the provision allowing states to pause work for up to 60 days during peak agricultural seasons.

The report said the next few months, particularly the post-pause rebound across states, will determine whether the July-August decline was mainly a transition shock or evidence of a structurally lower reach of the rural employment guarantee.

"The next couple of months should see this newly launched rural employment guarantee programme scaled up further," SBI Research said.