Will loan EMIs increase again? RBI issues a major warning in its report

RJ Kesari News Desk: Minutes from the Reserve Bank of India's (RBI) August monetary policy meeting revealed that India's monetary policymakers may consider raising policy rates in the third quarter if rising food and fuel prices trigger a broad-based inflation spike. 

The risk of a broad-based inflation spike remains because, as of June, there was no evidence of overheating prices, despite an erratic monsoon and renewed conflict in West Asia.

In a meeting held between August 3 and 5, RBI Governor Sanjay Malhotra stated that we need to remain vigilant as rising prices of food, fuel, and other inputs pose risks of inflation spiraling higher and spiraling out of control. 

The policy rate was maintained at 5.25% at this meeting. He stated that if there is evidence of these risks materializing, policy tightening may be necessary. This means interest rates could be raised.

Interest rates may be increased

In the RBI report, Deputy Governor Poonam Gupta expressed similar concerns. She said that since inflation is projected to reach a high of 5.9 percent in the third quarter of 2026-27, rate increases may be necessary during the year. 

Headline inflation, measured by the Consumer Price Index (CPI), is projected at 5 percent for fiscal year 2027, 

while it is projected at 4.7 percent for the second quarter and 5.5 percent for the fourth quarter. Core inflation, which excludes changes in food and fuel prices, is projected at 4.3 percent for fiscal year 2027.

Inflation is continuously increasing

Governor Malhotra stated that monetary policy action is needed in the event of a supply-side shock (a sudden change in supply), 

when there are signs of widespread inflation, uncontrolled inflation expectations, or persistent inflation. After remaining normal and within the 4 percent target for 16 months, headline inflation rose to 4.4 percent in June and 4.5 percent in July.

Malhotra highlighted signs of inflation normalizing from previously normal levels. He said that last year, when the policy rate was reduced to 5.25 percent, the average inflation rate was only 2 percent, 

while this year the headline inflation rate has already averaged 3.93 percent. Core inflation, which excludes changes in food and fuel prices, is also projected to average 4.3 percent in 2026-27. He said this could signal the need for a policy rate change.