On Our Minds RBI Preview August hold likely, but the policy runway is narrowing

On Our Minds RBI Preview: August hold likely, but the policy runway is narrowing

• We expect the RBI to hold the repo rate at 5.25% in August, as inflation above 4% is Kunal Kundu not yet enough to justify immediate tightening. • Growth risks support a pause, especially after the RBI cut FY27 GDP growth to 6.6% from 6.9% amid West Asia-related supply risks and sectoral stress. • Retail inflation has risen slower than wholesale inflation, indicating that producers have so far absorbed much of the input-cost shock. • The RBI is likely to look through first-round supply shocks from food, crude and geopolitics, unless they prove persistent. • The real risk is second-round inflation, as lingering geopolitical risk keeps crude prices elevated, supply chains disrupted and limited input-cost normalisation increase the risk of future pass-through to retail prices. • That risk is rising, with large corporates already signalling price hikes in categories such as toothpaste, tyres and paints ahead of the festive season for the second straight quarter. • Core inflation is now the key monitorable, as broadening price pressures beyond food and fuel would signal more embedded inflation. • August is likely to be a hold, but not a dovish one; if corporate price hikes lift retail and core inflation, a 4Q26 rate hike cannot be ruled out.

Current margin pressure may eventually translate into margin Input prices surged significantly, leading to margin squeeze expansion that is currently visible Primary article plus fuel & power-3MMA Fuel & power Mineral oils Mfg pdt-3MMA 140 25

- Jan-24 Jul-24 Feb-25 Sep-25 Apr-26 Source: SG Cross Asset Research/Economics, CEIC

We expect the RBI to maintain status quo at the August 3-5, 2026 MPC meeting, keeping the repo rate unchanged at 5.25%. While inflation has moved back above the 4% target, the case for an immediate rate hike is not yet sufficiently compelling. In our view, the RBI is likely to look through the near-term inflation shock for now, but the comfort that allowed it to treat the recent price pressure as transitory is beginning to erode. As a result, while an August hold remains our base case, we do not rule out the probability of a rate hike in 4Q26.

The central issue for the MPC is not whether inflation has risen. It clearly has. June CPI inflation rose to 4.4% yoy, with food inflation at 5.32% yoy. However, the policy question is whether the current inflation impulse is becoming broad-based, persistent and generalised enough This document contains important disclaimer and disclosure information. Please refer to the back inside cover of this research report.

to warrant monetary tightening. On that count, the evidence remains mixed. Retail inflation, the RBI’s primary policy anchor, has risen much more gradually than wholesale prices, suggesting that producers have so far absorbed part of the input-cost shock rather than fully passing it on to consumers. This likely reflects continued caution around the durability of demand.

Headline CPI breached RBI’s median target Core inflation inching up % yoy CPI % yoy Core CPI 8 7.0

Source: SG Cross Asset Research/Economics, CEIC

That said, this margin-absorption phase may now be nearing its limit. Several large consumer- facing companies have already signalled price hikes (for the second quarter running) across categories such as toothpaste, tyres and paints ahead of the festive season. This is important because it creates the bridge between the current phase of contained retail pass-through and the risk of broader inflation later in the year. If corporates begin passing on accumulated cost pressures more aggressively, the current wholesale-led inflation impulse could start showing up more clearly in retail prices.

This distinction between first-round and second-round inflation effects is critical to understanding the RBI’s likely reaction function. The RBI may be willing to tolerate first-round supply shocks arising from food, crude oil, freight costs or geopolitical disruptions, particularly if such shocks are expected to be transient. However, the central bank’s tolerance would weaken if these shocks began to generate second-round effects. In this context…