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Informist, Wednesday, Oct. 7, 2026

 

By Kabir Sharma

 

MUMBAI – By the time the Reserve Bank of India governor's statement reached the screens, almost everyone had already done the arithmetic. Market participants had treated a 25-basis-point increase in the key RBI repo rate as a given, a view shared by about 85% of respondents in an Informist Poll. The Monetary Policy Committee delivered it unanimously, taking the repo rate to 5.50%.

 

The surprise came two sentences later.

 

The MPC changed its stance from "neutral" to "calibrated tightening", a phrase the Reserve Bank of India last used in October 2018 under the then governor, Urjit Patel. The significance of the move this time lies not simply in the possibility of another rate hike, but in what it says about the central bank's reaction. The RBI is no longer comfortable treating the latest inflation pressures as merely temporary supply shocks.

 

Yet, the message was carefully calibrated. Governor Sanjay Malhotra said "rate cuts are off the table in the near term" and policy action ahead could only be a rate hike or a pause. He did not, however, promise another increase. In other words, the RBI has effectively put a floor under rates without telling the market where the ceiling lies.

 

Quantum AMC's Fund Manager Sneha Pandey said calibrated tightening "should not be interpreted as a commitment to a preset hiking path". That distinction is central to understanding the policy decision. The stance is hawkish, but it is not a harbinger of a prolonged hiking cycle.

 

A DIFFERENT INFLATION STORY

In October 2018, when the MPC last adopted calibrated tightening, it actually lowered its inflation projection and described the inflation outlook as "benign". This time, the MPC raised its headline inflation forecast for 2026-27 (Apr-Mar) by 20 basis points to 5.2%, explicitly saying inflation and its outlook were "not benign."

 

Consumer price inflation accelerated to 4.8% in August from 4.5% in July, while core inflation rose to 4.2?ter remaining at 3.9% for three consecutive months. The RBI expects headline inflation to average almost 5.8% over the next three quarters.

 

The governor's own summary was unusually direct: inflation and its outlook, he said, "are not benign as they were last year." The RBI is no longer simply waiting for a supply shock to fade before deciding whether it matters for monetary policy. It is increasingly concerned about the possibility that an initial shock could feed into expectations and into broader inflation.

 

Rishabh Nahar, partner and fund manager at Qode Advisors, described the shift as evidence of the RBI's "willingness to change its reaction function", saying the central bank was no longer comfortable treating inflation as merely a transient oil shock. Shriram General Insurance's Ashwani Dhanawat similarly called the decision "prudent, pre-emptive", arguing that waiting for the full pass-through to appear in consumer prices could risk allowing inflation expectations to become entrenched.

 

GROWTH GIVES RBI ROOM

The economy expanded 7.8% in the first quarter and the RBI raised its full-year growth forecast to 7.1%, an increase of 40 basis points. That combination matters. The RBI is tightening its inflation tolerance at a time when the economy appears capable of absorbing tighter financial conditions.

 

YES Bank Chief Economist Indranil Pan said the growth upgrade itself was a signal that "the fear of growth sacrifice due to a rate hike cycle is now low." That makes the current policy mix fundamentally different from a situation in which the central bank is forced to choose between supporting growth and containing inflation. For now, the strong growth allows the RBI to focus on controlling inflation.

 

But the evidence is not straightforward. The governor acknowledged "some evidence of elevated inflation expectations and generalisation of inflation", but also said there were only "limited signs of supply side pressures getting embedded in pricing behaviour." Demand pressures, too, remained limited, although strong credit growth presents a potential risk. Bank credit is expanding around 19% on year.

 

YES Bank's Pan therefore found the stance change somewhat surprising, given the RBI's own assessment of the inflation trajectory. The difficulty, Malhotra acknowledged, is that it is not easy to separate the effects of supply shocks from the second-round effects they generate. It is "difficult to distinguish between the second-round effects and the indirect impact of supply side pressures", he said, because the same indicators can capture both.

 

That admission is important, economists said. The RBI is not claiming that a broad-based inflation problem has already become entrenched. Rather, it appears increasingly unwilling to wait for conclusive evidence before adjusting its policy. 

 

HIGHER OR LONGER?

The market's interpretation of the new stance is therefore likely to be more important than the label itself. Nobody expected a rate cut and most economists now see at least one more rate hike as possible. YES Bank went furthest, calling a December increase a "certainty". UTI AMC's Anurag Mittal said close to 100 basis points of hikes were already priced into yields.

 

History offers a useful counterpoint. After the RBI adopted calibrated tightening in October 2018, the central bank delivered no further hikes, even though it had already increased rates twice before changing the stance. The lesson is that calibrated tightening does not necessarily mean a long hiking cycle. It can instead function as a signal that the hurdle for easing has become much higher.

 

The stance shift also comes against a backdrop of abundant liquidity. System liquidity has averaged a surplus of around INR 5.9 trillion since August, while the overnight call rate has traded below the repo rate. Yet, the RBI did not announce a major new liquidity-draining measure. Instead, Malhotra said the central bank would "strive to align" the call rate with the repo rate. At the press conference, he also ranked a hike in banks' cash reserve ratio relatively low among the available tools.

 

Liquidity absorption, therefore, is likely to be gradual, through instruments such as reverse repo auctions and open market operations sales, along with the natural drainage of liquidity through currency in circulation.

 

There is also a technical question around the word "stance". Emkay Global's Chief Economist Madhavi Arora noted that monetary policy stances are conventionally described as accommodative, neutral or restrictive, making "calibrated tightening" an unusual formulation. She viewed it as closer to forward guidance than a technical stance, and the press conference clarified that there is no formal vote on the stance itself.

 

Whether the terminology fits conventional definitions or not, the communication objective is clear. The RBI has told markets what it does not intend to do: cut rates in the near term. It has deliberately stopped short of saying what it will do next. With 36 footnotes of data backing the assessment, the central bank has provided a detailed evidentiary basis for its change in tone. The announcement of a Technical Consultative Committee for Financial Markets, aimed at structured engagement with market participants and other stakeholders, fits the same broader communication effort.

 

The RBI has closed the door on rate cuts without committing itself to a predetermined path of rate increases. It has drawn a floor under the policy rate while leaving the ceiling deliberately undefined. And that may be precisely what the governor intended. If the next decision follows the language, the governor's one sentence will have done its job. If the RBI pauses, it will have shown that the stance meant what it said.  End

 

Edited by Avishek Dutta

 

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