RBI MPC 03.06 to 05.06 - vote for increase

 RBI MPC second meeting of FY 26-27

Will it recognize the market trends ?

The second bi-monthly review meeting of the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) for the current financial year (FY 26-27) started today.

Before looking at the current position/movement of the various economic factors that form part of MPC discussion, I intend to present the following important events  in the last one month that might have a long term impact on the Indian economy.

1. On 10th May 2026, the Prime Minister appealed to the Indian citizens to minimize the use of fuel, cooking oil, purchase of gold and use public transport instead of private vehicles. Reason - the uncertainty on oil price, rupee's struggle to find its value versus USD and the unabated foreign currency outflows.

2. Following PM's appeal, the import duty on gold/silver was hiked by the Central Government to 15% with immediate effect. 

3. Close on its heels, RBI Governor stated that (on 13th May 2026) the increase in oil prices are likely, if the tensions in the Middle-East continue for a prolonged period.

4. As a sequel, from 15th May 2026, the fuel prices increased by ₹ 7.30 per liter (in four instalments) and there are indications that the total increase may go upto ₹ 12 per liter. Separately, the domestic LPG cylinders were hiked in Mar'26 and non domestic LPG/CNG cylinders are also witnessing constant price increases.

Now a look at the main points that usually gets discussed in the MPC, while the members review the policy rate: 

1. Though the CPI inflation is on the rise since Dec'25 and reached 3.48% in Apr'26, even now it is less than the target rate of 4%.  

2. It can be argued that the real interest rate, after factoring in the CPI inflation, is still positive, as the deposit rates are above the repo rate of 5.25%. (However, the deep depreciation of ₹ resulted in making the investment in Indian stock/securities unattractive for Foreign Portfolio Investors at the current interest rates offered in India).

3. The factory output growth based on the new series of Index of Industrial Production (IIP) with base year of 2022-23 is 4.9% in April 2026 and is higher than 3.2% recorded in March 2026.

4. Forex Reserves, though there is a steep decline in the last few months, is still comfortable at USD681 billion, adequate to cover nine month imports. 

Notwithstanding the above positive factors, the worrying issues are (i) the significant depreciation in ₹ versus USD since Jan'26 (7% decline so far) (ii) the FPI outflows, since 1st Apr'26 continues (USD 24 billion) and (iii) the deficit in balance of payments has gone up by six times to USD 30.8 billion in FY26, per RBI Annual Report. (deficit in FY25 was USD 4.9 billion).

In the above back ground, I honestly feel that RBI MPC should increase the repo rate at least by 25 bps and maintain the monetary stance as  'neutral'. The reasons are:

a. PM's call for austerity measures and the immediate fiscal measures like the increase in import duty on gold/silver, increase in fuel prices by the oil companies can be compared with the 'Safety Car' concept in F1 motor car race. (Safety Car is used, whenever the organizers think that there is a risk to running the F1 cars at full speed).

b. CPI inflation, already on the rise, is likely to breach the target rate of 4% in the current/next month, as imported inflation is translated into the domestic economy in the form of increase in duty, fuel and gas prices. An increase in the repo rate will help to keep the inflation in control. 

c. Though the marginal increase of 25 bps might not impact the bank borrowers materially or give the incentive to the NRIs/foreign investors to invest into India immediately, it will certainly make the bankers/borrowers more cautious  and also make the foreign investors feel that the MPC members are abreast and respond to the situation by applying the right brakes.

d. To remove any apprehension that a pivot is set in by an increase in the repo rate now, maintaining the stance at 'neutral' should calm down the markets. 

Regards

V. Viswanathan
CGM Retd. e-SBT

3rd June 2026