RBI MPC member warns projected inflation could turn real policy rate negative

A member of the RBI Monetary Policy Committee has warned that the projected inflation trajectory could turn the real policy rate negative at the current repo rate, arguing that calibrated rate hikes are needed to bring inflation closer to target.

In the minutes of the October 5-7 monetary policy meeting released on Wednesday, RBI MPC member Ram Singh said retail inflation was expected to remain elevated, averaging almost 5.8% over the next three quarters and approaching the upper limit of the RBI's inflation tolerance band.

"Additionally, at the current repo rate level, the projected inflation trajectory will render the real rate negative, generating perverse saving-consumption trade-offs," he said.

The real policy rate is the nominal policy interest rate adjusted for inflation.

A negative real rate means inflation exceeds the nominal rate, potentially affecting incentives to save and spend.

The RBI's Monetary Policy Committee (MPC) unanimously voted to raise the policy repo rate by 25 basis points to 5.50% at its October meeting, citing rising inflationary pressures despite resilient economic growth.

The central bank has projected consumer price index (CPI) inflation at 5.2% for 2026-27, up from its earlier estimate of 5%. Inflation is projected to rise to 6% in the December quarter before easing to 5.7% in the March quarter.

Singh said inflationary pressures had spread beyond the direct effects of fuel, energy and commodity prices, with emerging evidence suggesting that firms were passing higher input costs on to consumers.

He also cited a rise in core inflation and an increase in the number of items in the CPI basket recording inflation above 4%. The RBI's September household survey showed that median inflation expectations for the next three months had jumped to 9.9%.

"To realign the inflation trajectory towards the target, and from the real repo rate perspective, a calibrated increase in the repo rate is needed," Singh said.

He added that the duration and magnitude of further rate hikes would depend on the evolving growth-inflation outlook.

"For now, there is a case for incremental, mild repo rate hikes, not high-for-long rates," he said.

However, Singh opposed changing the monetary policy stance from neutral to calibrated tightening, saying such a move could signal an extended cycle of rate hikes and undermine the benefits of growth-supportive monetary and fiscal policies.

Nagesh Kumar, another external member of the MPC, also favoured retaining the neutral stance while supporting the 25-basis-point rate hike, citing continuing geopolitical and trade policy uncertainties.

The MPC raised its growth forecast for 2026-27 to 7.1% from 6.7% projected in August, reflecting stronger-than-expected economic activity.

All six MPC members voted in favour of the repo rate increase, while Singh and Kumar were the two members who favoured retaining the neutral stance.