Indian markets have been left “confused” by the Reserve Bank of India’s focus on inflation excluding food, fuel, and precious metals in its monetary policy decision on Wednesday, according to Murthy Nagarajan, Head of Fixed Income at Tata Asset Management.“RBI has said it is looking at headline inflation. But the language which has been used shows that it is looking at core inflation,” Nagarajan told Siddharth Upasani in an interview. He also discussed how the Monetary Policy Committee may act in the future and Foreign Currency Non-Resident (Bank) deposits possibly touching $100 billion. Edited excerpts:Yes. Just a week ago, the Governor gave an interview where he made similar statements. So, the market was expecting this to be a dovish policy. But the way in which he spoke on Wednesday was still a surprise.While he was expected to talk about inflation, he has changed the context. Now the general view is that the RBI is looking at core inflation and core inflation excluding precious metals, which is projected to rise from around 2.5% and move towards 4%. If that is the case and 4% is the target, the feeling is that most probably in our view there will not be any rate hikes in 2026-27.It is slightly confusing for the market. My reading is that because there is so much uncertainty, the RBI wants to keep the powder dry right now.Moreover, FPI flows into debt have been strong and FCNR(B) inflows could be $80 billion-$90 billion at least and possibly touch $100 billion. In this situation, there doesn’t seem to be a worry about forex. Back in February, the view was that Brent oil prices will go below $70 per barrel. If we were to move towards that, should things clear up, then there may not be a need to hike rates. And if growth is strong, equity inflows can start coming back to India.It’s a wait-and-watch situation. I believe, if inflation goes above 5% and the war continues, then reluctantly the RBI will hike rates. It will try to push it as far as possible because it is looking for signs of strong growth. The Indian market is more a function of growth; we are a growth economy. FDI, FPI inflows will come only because of growth. We are a BBB (rated) economy and the only reason why FPI will come is for high growth, so we have to grow fast.Story continues below this adIs the MPC actually targeting core inflation excluding precious metals and the headline number is only a target on paper?Yes. But, from the RBI’s perspective, it does not know when the war will end, there was a 40% rainfall deficit in June and 11% or so now. Oil prices are another uncertainty – so it is really difficult to take a call. It’s difficult to make predictions even in a normal environment.I think the RBI also wants to defer its interest rate decision because if headline inflation is forecast to be above 5% for three consecutive quarters starting Q3 this year, then you should have hiked now – one-year forward, inflation is projected at 5.3% and the repo rate is 5.25% right now. So, you are in a negative real interest rate territory. The only way you can justify that is by focusing on core inflation.Essentially, the RBI wants to buy more time because the growth and inflation trajectory is not clear. Obviously, we are required to stabilise interest rates; whether it should be done now or after 6 months, that is the question. I think the RBI has taken a call that it’ll be prudent to do it after 6 months. They have first decided they don’t want to hike rates and then looked at the (reasons).RBI has said it is looking at headline inflation. But the language which has been used shows that it is looking at core inflation. I think over the next 3-6 months they will start looking at headline inflation and make a decision.Story continues below this adApart from the forecast of 5%-plus inflation, the RBI’s assessment of growth is encouraging. And yet it is dovish. Is there some policy inconsistency?For us sitting in India, it almost feels like there is no war going on: growth seems to be strong, fiscal deficit numbers look good, and there is strong credit growth – it does not feel like the first quarter of a financial year, when there is normally some slack.I think the RBI has got time to normalise interest rates. They have said any excess liquidity will be taken out over a period of time because it has a forward book of around $100 billion right now. Forex reserves may be around $692 billion, but $100 billion of that is gold and another $20 billion or so are the Special Drawing Rights and the Reserve Position in the IMF. You remove all that and it is around $550 billion. And you can’t have a forward position which is more than 20% of that; it can’t be that high.If you want to control inflation, the best way is through money supply. I think the RBI will squeeze money supply if inflation goes above 5-5.5% and the operating rate may be 5.5-5.75% even if the repo rate stays at 5.25%. The RBI has the tools to do that.Anyway, we are not in a situation where we have runaway inflation. Even if the repo rate is raised by 25 basis points every policy meeting, within six months it will be at 6%, which is OK. Then growth will slow down.Story continues below this adWhat also matters is the potential growth rate: is it 7% or 8%? Nobody knows, because the GDP series is new. If you think it’s 7.5-8%, then there is some amount of slack if you are growing at 6.7%, which is the RBI’s forecast for 2026-27.If the RBI thinks there is some slack in the economy, then it may not have to hike rates as much and 50 bps in 2026-27 may be enough. I think it will start raising the repo rate in December.Bloomberg has deferred the inclusion of Indian government bonds into its global index. When do you expect that to happen?They are asking for more time. There are also theories that they want bonds to be settled offshore on platforms like Euroclear, but the government is not interested in allowing that.Finally, it has only been deferred. It is not possible that Indian government bonds are part of JPMorgan and other indices but not Bloomberg. So, it’s only a matter of time. Another 6 months or a year, I expect the inclusion could happen.