Headline CPI hit 4.38% in June. Core held steady at 3.9%. Yet 89% of items in the CPI basket got costlier compared to May. That’s the puzzle the RBI is trying to explain away. The MPC’s minutes say inflation is “aligning with the target” and policy will be “dovish.” Translation: rates may stay lower for longer because food and fuel volatility is temporary. The argument: don’t react to supply shocks.
Economists aren’t buying it.
When almost 9 out of 10 items see price rises month-on-month, that’s not just vegetables or crude. That’s demand. That’s core. That’s sticky. From services to manufactured goods, the pressure is broadening. ANZ economists call it “early signs that price pressures are spreading beyond food and fuel.”
The RBI says it needs clarity on inflation dynamics. Fair. But clarity cannot mean waiting until inflation is already above target for months. By then, it’s too late. The last time core stayed near 4% for this long, we saw a full rate-hike cycle. There’s also a communication gap. The MPC wants to look through food inflation. But people don’t live on “core CPI.” They live on dal, rent, school fees, and medicines — all of which are rising. Telling households “don’t worry, core is fine” erodes credibility.
Globally, central banks that cut too early paid the price. The Fed, ECB, even Bank of England had to reverse course in 2023-24. India has fiscal space and growth, but it doesn’t have immunity.
The RBI isn’t wrong to be cautious. Aggressive hikes could kill investment. But being dovish when the data is turning is equally risky. Inflation expectations, once unanchored, are hard to bring back. The next few months will tell. If monsoon is good and oil stays soft, the RBI will look smart. If not, itk will be chasing inflation instead of leading it.
For now, the message to markets is clear: the RBI sees what it wants to see. Economists see what the data actually says. And those two don’t match.