Shift in Position Highlights Careful Strategy
RBI Adjusts Policy Stance to ‘Neutral’ Following Rate Cuts, Indicating Cautious Hope
Governor Sanjay Malhotra of the Reserve Bank of India (RBI) has adjusted the policy stance to a ‘neutral’ position after a series of rate cuts, reflecting a sense of cautious optimism. He noted that there is limited scope for further rate reductions in light of easing inflation. Experts appear divided on the prospects for future rate cuts, with opinions largely dependent on evolving data, weather patterns, and global commodity trends. The growth forecast remains steady at 6.5%.
The inflation expectations for the April-June quarter have been revised to 2.9%, down from 3.6% in the previous policy meeting, while the forecast for July-September has been adjusted to 3.4% from 3.9%, and for October-December from 3.8% to 3.9% (PTI). In a surprise move, the Monetary Policy Committee (MPC) caught market analysts off guard with a 50-basis-point rate cut and a 100-basis-point reduction in the cash reserve ratio, before opting to revert to a ‘neutral’ stance from the previously ‘accommodative’ one. This decision received unanimous support from all six MPC members.
Governor Malhotra explained, “Having reduced the policy repo rate by 100 basis points in rapid succession since February 2025, we find ourselves with constrained options to bolster growth under current conditions. Therefore, the MPC has decided to transition from an accommodative to a neutral stance.” He emphasized the MPC’s intent to carefully evaluate incoming data and the developing landscape to inform future monetary policy strategies aimed at achieving an appropriate balance between growth and inflation.
Economists are split on whether this marks a mere pause in the rate-cutting cycle or if additional reductions are anticipated in FY26. Nomura has pointed out potential downside risks to the RBI’s GDP growth and CPI inflation projections, predicting that GDP growth could fall to 6.2% (compared to RBI’s 6.5%), and CPI inflation might track lower at 3.3% (as opposed to RBI’s latest revision of 3.7%). Consequently, they believe that recent actions do not signify the conclusion of the easing cycle, projecting terminal rates to rest at 5.00%, with a pause expected in August and a 25-basis-point cut anticipated in both October and December reviews.
On the other hand, Barclays noted that the governor has provided clear forward guidance indicating the MPC’s commitment to being data-driven. The mention of having “limited space to support growth,” paired with the inflation trajectory, suggests that this data dependency may lead to maintaining the current status in the near term. “The repo rate is now 100 basis points lower than at the start of the year, which we initially considered the terminal level for this cycle. Together with the change in stance and the governor’s remarks, this indicates a likely pause in the upcoming August 6 policy meeting,” Barclays commented.
The anticipated early onset of the monsoon could bode well for the kharif crops and most forecasts indicate a potential decline in prices for key commodities including crude oil, which influenced the committee’s decision to lower the inflation estimates. “We can confidently say we have successfully combat inflation,” Malhotra asserted, as the MPC reduced its inflation forecast for 2025-26 (April-March) by 30 basis points to 3.7%. The inflation estimates for April-June are now set at 2.9%, from a previous 3.6%, July-September at 3.4% down from 3.9%, and for October-December at 3.9% compared to 3.8%. The projection for the fourth quarter remains stable at 4.4%, while the target for the upcoming fiscal year is set at 4.5%.
However, Malhotra emphasized the importance of staying vigilant regarding weather uncertainties and evolving tariff issues that could impact global commodity prices. While the food inflation outlook appears favorable, core inflation is expected to remain manageable, aided by declining international commodity prices in line with the anticipated slowdown in global growth.
In terms of growth, Malhotra acknowledged that it continues to lag behind the RBI’s aspirations in a challenging global environment with heightened uncertainty. The growth forecast for the current fiscal year holds at 6.5%. The central bank aims for growth between 7-8%. He pointed out the necessity to stimulate domestic private consumption and investment through various policy measures to enhance growth momentum. According to a report from DBS Bank, while the growth rate is easing, the proactive approach to implement easing measures is likely a strategic move to mitigate a deeper slowdown in economic activities.
