The RBI-led Monetary Policy Committee kept the policy rate unchanged and retained its neutral stance, warning that El Niño, volatile global oil prices and geopolitical tensions could complicate India’s inflation trajectory even as underlying price pressures remain contained.
The Reserve Bank of India (RBI) on Wednesday flagged El Niño, volatile global oil prices and geopolitical developments as key risks to India’s inflation outlook, even as it projected consumer price inflation at 5 per cent for 2026-27.
The Monetary Policy Committee (MPC), chaired by RBI Governor Shaktikanta Das, voted to keep the policy rate unchanged and retained its neutral stance, choosing to wait for greater clarity on the trajectory and composition of inflation before considering its next policy move.
The central bank’s caution comes after headline CPI inflation rose to 4.4 per cent in June 2026, moving above the RBI’s 4 per cent target after remaining below it for 16 consecutive months. Despite the increase, inflation during the first quarter turned out to be around 30 basis points lower than the RBI’s earlier projection.
The June increase was primarily driven by food and fuel prices. According to the RBI, food inflation pressures were broad-based during May and June, with most components registering higher prices.
Fuel inflation also accelerated following revisions in retail prices after a sharp spike in international energy prices. The impact spilled over into some other categories, including restaurant charges.
However, the central bank stressed that the price shock has not yet translated into broad-based inflationary pressure.
More from BusinessCore inflation — which excludes food and fuel — remained unchanged at 3.9 per cent during May-June despite higher input costs. More importantly, core inflation excluding precious metals remained considerably softer at 2.3-2.5 per cent, suggesting that underlying demand-driven inflation remains contained.
El Niño emerges as a key inflation risk
The RBI identified El Niño and its potential impact on the temporal and spatial distribution of rainfall as an important risk to food prices going forward.
While proactive supply-side management and adequate foodgrain stocks could provide a buffer, uneven rainfall could potentially disrupt agricultural production and put renewed pressure on food inflation.
The central bank also highlighted uncertainty surrounding global energy markets. International oil prices have witnessed sharp two-way movements amid geopolitical developments, making the near-term inflation trajectory harder to predict.
The MPC warned that although generalised inflationary pressures remain modest, there is still a risk that higher food, fuel and other input costs could eventually spill over into broader prices.
RBI sees inflation peaking at 5.9% in Q3
The RBI now projects CPI inflation at 5 per cent for FY27, with inflation expected to accelerate over the next few months before easing.
Its quarterly projections put inflation at 4.7 per cent in Q2, 5.9 per cent in Q3 and 5.5 per cent in Q4 of 2026-27. CPI inflation is then projected at 5.3 per cent in Q1 of 2027-28, with risks evenly balanced.
Core inflation is projected at 4.3 per cent for FY27.
The RBI expects headline inflation to peak during the third quarter of FY27, largely because of food and fuel prices, before moderating thereafter.
Crucially, the central bank said core inflation excluding precious metals is expected to remain lower in the near term, indicating that demand-side price pressures remain contained.
Why RBI chose to hold rates
The inflation outlook appears to have played a central role in the MPC’s decision to stay on hold.
While growth continues to be supported by resilient domestic demand, expansion in manufacturing and services and robust exports, the RBI described the broader outlook as “hazy” amid uncertainty surrounding the southwest monsoon, El Niño, geopolitics and global trade policy.
The MPC said greater clarity was required on both the path and composition of inflation before taking further policy action.
For now, the RBI’s assessment suggests that India’s inflation problem remains predominantly supply-driven rather than demand-driven. But with headline inflation expected to climb towards 6 per cent in the coming months, the central bank is keeping its guard up against food and energy shocks spilling into the wider economy.
