Archive · 9 Aug 2026
Markets confused by RBI's core inflation focus, says Murthy Nagarajan
The Reserve Bank of India is the country's central bank - like a big bank for banks - and it decides interest rates.
Interest rates are the price you pay to borrow money.
When prices of things go up, which is called inflation, the central bank usually makes borrowing costlier to cool things down.
This week, the RBI made a decision about rates that confused stock market experts.
The RBI said it watches overall inflation, but its words suggested it was really watching 'core' inflation, which excludes food and fuel.
One expert, Murthy Nagarajan, said the RBI is probably waiting because there is too much uncertainty - a war, less rain than usual, and changing oil prices.
He thinks the RBI will not raise rates for a while, even though prices are expected to rise faster than the current interest rate.
He expects rates to start going up around December, and that India's bonds might soon be added to a big global index.
Basically, the RBI is keeping its options open and watching how things play out.
The RBI's Wednesday monetary policy decision left markets 'confused' because its language appeared to target core inflation even though it stated a focus on headline inflation, according to Tata Asset Management's Murthy Nagarajan.
Core inflation excluding food, fuel and precious metals is projected to rise from around 2.5% toward 4%, suggesting there will be no rate hikes in 2026-27.
One-year forward headline inflation is projected at 5.3% against a 5.25% repo rate, putting India in negative real interest rate territory.
FCNR(B) deposit inflows could reach $80-90 billion, possibly touching $100 billion, supported by strong FPI flows into Indian debt.
Nagarajan expects the RBI to start raising the repo rate around December and predicts Bloomberg's inclusion of Indian government bonds within six months to a year.
- Who
- The Reserve Bank of India's Monetary Policy Committee, with commentary from Murthy Nagarajan, Head of Fixed Income at Tata Asset Management.
- What
- The RBI's monetary policy decision, which left markets confused over whether the central bank is targeting headline or core inflation; no rate hikes are expected in 2026-27.
- When
- On Wednesday, at the RBI's latest monetary policy meeting.
- Where
- India (Indian financial markets).
- Why
- The RBI faces uncertainty from the ongoing war, a rainfall deficit, oil prices and the inflation trajectory, so it wants to keep its powder dry and defer interest rate decisions.
RBI's Dovish Deferral
Case for Imminent Rate Hikes
Headline vs. core inflation
RBI's Dovish Deferral
The RBI states it is looking at headline inflation, but its policy language signals a focus on core inflation (excluding food, fuel and precious metals) to justify waiting before acting.
Case for Imminent Rate Hikes
Markets find this confusing: if the true target is core inflation moving toward 4%, rate hikes may never come, even though one-year-forward headline inflation is projected at 5.3%.
Timing of rate action
RBI's Dovish Deferral
With the war, a rainfall deficit and oil price uncertainty, the RBI wants to keep its powder dry and defer hikes; no increases are expected in 2026-27.
Case for Imminent Rate Hikes
With negative real interest rates and headline inflation forecast above 5% for three consecutive quarters, a hike would be justified now; Nagarajan believes the RBI will 'reluctantly' hike if inflation exceeds 5%.
- Central bank
- Reserve Bank of India (RBI)
- Repo rate
- 5.25%
- One-year forward inflation projection
- 5.3%
- Core inflation projection
- Rising from ~2.5% toward 4%
- RBI growth forecast (2026-27)
- 6.7%
- Forex reserves
- ~$692 billion; net ~$550 billion excluding gold and IMF positions
- Expected FCNR(B) inflows
- $80-90 billion, possibly touching $100 billion
- Source of commentary
- Murthy Nagarajan, Head of Fixed Income, Tata Asset Management