India’s central bank signals shift toward rate normalisation, but October pause expected

The Reserve Bank of India’s (RBI) latest monetary policy minutes have revealed a notable shift in the debate among policymakers, moving from further monetary easing towards the eventual normalisation of policy. While the October review is widely expected to result in another pause, the possibility of a rate hike before the end of the financial year has become increasingly plausible.

What do the RBI minutes reveal about future rate decisions?

QuantEco Research observed that the committee’s discussion has now centred on when normalisation should begin, rather than how much further accommodation is available. The firm expects the RBI to hold rates in October but noted that December has become a “live option” for a potential hike.

The minutes were more hawkish than the August policy statement. Governor Sanjay Malhotra referred to the possibility of recalibration, while Deputy Governor Poonam Gupta flagged a case for a hike. This shift occurs despite the absence of clear evidence that recent food price increases are broadening into a more persistent, demand-driven inflation problem.

Why is the RBI likely to wait before raising rates?

Nomura described the minutes as “more hawkish than we expected” but argued that the trigger for tightening to curb demand is still absent. The firm suggested that a rate move could eventually be justified if inflation settles at higher levels and real interest rates normalise, even without a significant increase in core inflation.

For now, the Monetary Policy Committee (MPC) is likely to await further evidence. By the October meeting, members will have access to two additional inflation prints, first-quarter GDP data, and greater clarity on the monsoon. The trajectory of crude oil prices and geopolitical risks will also be clearer.

ICICI Securities Primary Dealership noted that the uniform preference among members to wait for more evidence suggests a rate hike in October is unlikely. The firm estimates the current odds of an October hike at around 20%, although a sharp upside surprise in inflation or sustained crude prices of $85-95 a barrel could alter that assessment.

How will inflation influence the RBI’s timeline?

The inflation outlook will determine how quickly the RBI ultimately moves. Headline inflation is expected to rise in the second half of FY27 as higher input costs, deficient rains, and adverse base effects exert pressure. Nomura expects inflation to rise towards 5-5.5% in H2FY27, although it still sees FY27 average inflation at 4.6%, below the RBI’s 5% forecast.

Barclays has also lowered its FY27 inflation forecast to 4.8%.

Is economic growth resilient enough to support a pause?

At the same time, growth remains sufficiently resilient to allow the RBI to prioritise inflation. SBI Research stated that growth is most likely to remain robust, as shown by all leading indicators, and maintained its call for a prolonged pause through FY27.

The more immediate concern is whether inflation begins to broaden beyond food. ICICI Global Markets said the minutes placed greater emphasis on risks to inflation becoming broad-based in coming months given buoyant demand. It expects rate hikes to begin when demand-driven inflation aligns with core inflation, with its base case being a move once core inflation excluding gold crosses 4% in Q4FY27.

Barclays expects the RBI to remain on hold through 2026 and begin a gradual 50-basis-point hiking cycle in the first half of 2027. QuantEco Research, meanwhile, expects a 25-50 basis point increase before the end of FY27.