India's central bank is expected to hold steady as "super core" inflation stays weak at 2.2%, even as headline pressures mount from rising fuel costs and an uncertain monsoon.
Despite rising fuel prices and the threat of a below-normal monsoon, the Reserve Bank of India is unlikely to raise interest rates in the near term, according to Aurodeep Nandi, India Economist and Executive Director at Nomura. The recent hike in petrol and diesel prices — totalling around Rs 7.5 per litre — along with CNG price increases, are expected to add roughly 50 basis points to inflation. Yet Nandi argues that the data does not yet justify a tightening response.
RBI likely to keep status quo on policy rate as threats loom
The key metric the RBI watches is not headline inflation but what Nandi calls "super core" inflation — the consumer price index stripped of petrol, diesel, gold, and silver. That measure currently sits at just 2.2%, indicating that firms are largely absorbing cost pressures rather than passing them on to consumers.
RBI warns prolonged West Asia conflict could hit India’s economy
"Just because we will have poor rains does not necessarily mean that inflation will shoot up. Data suggests that is not always the case." says Nandi.
El Niño: risk, not certainty
On the monsoon front, Nandi cautions against assuming that El Niño conditions automatically translate to a food inflation surge. An analysis of El Niño episodes over the past two decades shows the correlation between poor rains and food inflation is "patchy at best." Better seeds, improved irrigation, and government policy tools — including minimum support prices, export and import controls, and grain stockpiles — all play a significant role in determining actual food prices.
What the RBI is watching
Nandi points out that the RBI, in its April policy, committed to action only if supply-side pressures "morph into demand-side pressures", meaning broader price rises across the economy, not just in fuel or food. With household inflation expectations relatively anchored and core inflation tracking around 4.5% for the year, the case for an imminent hike remains weak.
However, Nandi stops short of ruling out tightening altogether. Prolonged geopolitical tensions in West Asia, further fuel price increases, and the possibility that companies eventually pass on costs to consumers all keep rate-hike risks alive. "This is certainly a high-risk zone," he said, adding that the RBI will want to observe incoming data before making any move.
