Life at MPC has been comfortable for some time, with members debating whether to address growth or inflation. But it just got tougher with murmurs about stability getting louder. This institution’s mandate may not cover financial and economic stability, but its actions impact them. And RBI that sits on top of MPC will take credit for good times, or carry the blame for messing up, depending on the outcome.As MPC meets later this week, for the first time in more than a decade, the economy is caught in a perfect storm — rupee at historic lows, soaring subsidies, spectre of fiscal deficit overshooting, acceleration in capital outflows and higher prices. While some of them may be self-inflicted, others are given.For much of its life, MPC has met market expectations with a few surprises. Many economists are factoring in a status quo. But meeting that would prove costly. There’s a distinct noise for raising cost of funds that may have merit. Arguments that inflation reading is low at 3.48% in April, and is far from its upper band of 6%, may appear to provide elbow room to keep interest rates unchanged to fuel growth.India is facing a challenge of sharply higher retail prices in the months ahead that would warrant steeper interest rates. After months of inaction, GoI has pressed the pedal on fuel prices. And its cascading impact is just beginning to be felt. Everything from manufactured goods to services like hospitals, hotels and transportation, are beginning to raise prices that are often disproportionate, leading to sharper-than-warranted increases in retail prices. Wholesale prices in April rose 8.3%.Automakers like Maruti and Hyundai have raised prices. It is not just the crude oil prices but most commodities including aluminium, copper and steel are on a tear, reflecting a broader price trend not just due to supply chain constraints but also because of demand fuelled by AI mania.Prices of food items, still dominating India’s consumer basket, are ticking up due to transport costs. It could only worsen, with El Niño likely hurting rainfall and crops. It’s tempting to look through these pressures until it gets entrenched. But that will prove to be more of a gamble than policy planning.While inflation presents a dim picture, fiscal deficit is worsening. GoI may have raised retail fuel prices, but a lot of it could still derail the fiscal math. It’s estimated to soar 75% to `3 lakh cr — not a small number to hide. No wonder yield on benchmark government bonds has risen 83 bps to 7% since May 2025, despite it keeping rates unchanged since December 2025, and trillions of bond purchases in the name of liquidity. Investors are already pricing in the government overshooting the budget target.Besides yields, a historic low for the currency reflects vulnerabilities the economy faces. Capital flow dictates the rupee’s fate. A capital-starved India benefited from non-stop printing of currencies by the developed world and some reforms. That’s not only drying up but also reversing.From about $73 bn of annual capital inflows between FY19 and FY24, flows fell to $17 bn in FY25, and likely turned a negative $5 bn last fiscal. Net FDI, a better gauge of long-term view of India among global investors, fell to about $3 bn in the 9 mths last fiscal from an annual $37 bn between FY19 and FY23.Dependence on forex reserves of nearly $700 bn to prevent further sharp slide in the currency could be risky. Stripping off the forward book of about $100 bn, reserves are where they were 5 yrs ago. Global factors such as trade war and war in West Asia may have triggered outflows. But the interest rate differential between the US and India, which is down to about 2.5 percentage points — less than half of what it was before the 2013 crisis — is the primary factor.A higher interest rate will not only arrest outflows but could also draw in funds, though a special deposit scheme to get the greenback may be warranted as early as possible.In a world where capital is free-flowing despite trade hurdles, the Indian economy is not an island. Interest rates worldwide are climbing. Australia, Indonesia and Sri Lanka have raised cost of funds. The stance that India is not in the same league can be a matter of pride. But in the overall tide of rising cost of funds worldwide — including in the US, despite Trump — it could be a mistake to ignore it. Even the political class has shown the way to mitigate the fallout of geopolitical developments, making gold and silver less affordable, and making petrol and diesel pricier.A 50 bps increase in repo rate to 5.75 may be warranted to signal RBI’s commitment to stability. In an economy where the private sector isn’t investing even at lower cost of funds, and the currency is collapsing, it won’t be a shock but a painkiller.(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)