RBI’s decision to raise the policy repo rate by 25 bps to 5.50 percent is not surprising. The surprise is in the stance. By moving to "calibrated tightening" and declaring that rate cuts are off the table, the MPC has signalled that this is the start of a hiking cycle, not a one-off correction. It is a sharp reversal from 2025, when the RBI cut rates by 125 bps and injected roughly Rs 14-15 lakh crore of liquidity.
The central bank has also raised its numbers. After a 7.8 percent GDP print for Q1, it lifted its FY27 growth projection by 40 bps to 7.1 percent. It moved up its inflation path as well, with Q3 FY27 now at 6.0 percent. Our view is that even this understates the risk.
The Monetary Policy Committee's (MPC) framework rests on three things: inflation expectations, the pricing behaviour of firms, and how widely inflation is spreading. All three point the concerning way. The RBI's household survey shows inflation expectations averaging 8.6 percent, far above headline CPI of 4.8 percent, and still rising. Its diffusion index shows price pressures spreading across a wider set of items.
Corporate data tells the same story. In the first quarter, input costs for non-financial companies, particularly manufacturers, rose about 40 percent year-on-year, against a 45 percent rise in crude prices. That is a far stronger pass-through than most models predicted, and margins were squeezed because product prices rose only partially.
The bigger concern is what has not yet shown up. The cost shock from the West Asia conflict has been cushioned by food, energy and fertiliser subsidies, and by under-recoveries at oil marketing companies, while retail fuel prices were raised only modestly. As this fiscal support fades, the pipeline of inflation will build. This is why we expect CPI inflation reaching 6-7 percent in the coming quarters, above the RBI's projected peak.