3 weeks ago
RBI's Dovish Stance, Core Inflation Focus Puzzles Economists
The Reserve Bank of India is the bank that looks after money in India.
One of its jobs is to keep prices from going up too fast.
The rate at which prices rise is called inflation.
Some things, like food and fuel, change price a lot from month to month.
The RBI usually watches the overall inflation number.
This time, though, experts think the RBI is watching a smaller number that leaves out food and fuel.
That smaller number is called core inflation, and it looked calm at 2.5 percent.
The RBI also kept interest rates the same.
Now some money experts are confused about what the RBI will do next.
They wonder if the RBI might raise rates later when the two inflation measures come closer together.
The RBI left the policy repo rate unchanged at 5.25% last week.
Headline CPI inflation rose to 4.38% in June from 3.93% in May, while core inflation stayed at 3.9%.
Core inflation excluding precious metals stood at a 'benign' 2.5% in June.
I-SEC PD economists led by A Prasanna say the RBI has 'zeroed in on core ex precious metals as the lodestar for monetary policy.'
ANZ economists see price pressures broadening, with 317 of the 358 CPI basket items seeing higher prices in June.
- Who
- The Reserve Bank of India (RBI) and its Monetary Policy Committee, along with economists from ICICI Securities Primary Dealership, ANZ, Nomura and Tata Asset Management.
- What
- The RBI kept the policy repo rate unchanged at 5.25% while its comments suggested a focus on core inflation excluding precious metals, puzzling economists.
- Where
- India.
- When
- The rate decision was announced last week (early August 2026); the inflation data referenced is for June 2026, with July data due the following Wednesday.
- Why
- Economists are debating whether the RBI is targeting underlying core inflation rather than the headline CPI number, and whether this signals future rate recalibration.
RBI / MPC View
Economists' Concerns
Is core inflation benign?
RBI / MPC View
The MPC says core inflation excluding precious metals 'continues to be benign' and is likely to align with core inflation towards the end of the financial year.
Economists' Concerns
ANZ economists see early signs of price pressures spreading beyond food and fuel, with annualised inflation in the sub-basket already running at 4-4.4%.
Timing of rate action
RBI / MPC View
The RBI wants more clarity on inflation and its drivers, and may recalibrate policy rates once the two core measures converge.
Economists' Concerns
Tata Asset Management's Murthy Nagarajan believes the RBI decided not to hike first and then looked for justifying reasons; Nomura expects no hike this year but recalibration if underlying inflation rises.
Clarity of communication
RBI / MPC View
The RBI frames its stance around the need for normalisation of underlying inflation from benign levels.
Economists' Concerns
I-SEC PD calls the communication 'somewhat confusing' and says ignoring above-target headline inflation 'raises question marks about the inflation target itself.'
Key facts
- Policy repo rate
- 5.25% (unchanged)
- RBI inflation target
- 4% headline CPI, within a 2-6% band
- Headline CPI inflation (June)
- 4.38%
- Headline CPI inflation (May)
- 3.93%
- Core inflation (June)
- 3.9%
- Core inflation excluding precious metals (June)
- 2.5%
- CPI basket size
- 358 items
- RBI headline inflation projections
- 4.7% (Jul-Sep 2026), 5.9% (Oct-Dec 2026), 5.5% (Jan-Mar 2027), 5.3% (Apr-Jun 2027)
Quotes
Murthy Nagarajan
Head of Fixed Income at Tata Asset Management
“I think the RBI has taken a call that it’ll be prudent to do it (raise interest rates) after six months”
indianexpress.com
“held to core inflation excluding precious metals as the lodestar for monetary policy”
indianexpress.com
Sources
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