Editorial: RBI’s cautious approach continues

Given external headwinds that could complicate the path forward, it is appropriate to maintain patience now

Global economic uncertainties have prompted the Reserve Bank of India to maintain a neutral stance and keep the repo rate unchanged at 5.5 per cent for the second time in a row. Apart from the United States’ whimsical tariff regime, prolonged geopolitical tensions, and volatility in global financial markets pose considerable risks to the growth outlook. The unanimous decision of the Monetary Policy Committee (MPC) to continue the pause mode suggests that the central bank is cautiously awaiting the global factors to play out, and also the impact of the previous rate cuts — a total of 100 basis points since February. Significantly, the RBI has raised its projection of GDP growth rate to 6.8 per cent for 2025-26, compared with 6.5 per cent projected in August. This estimate is in contrast to the Asian Development Bank’s lowered projection of 6.5 per cent for FY26. The optimism is essentially driven by domestic demand and GST reforms. An above-normal monsoon, good progress in kharif sowing, and adequate reservoir levels are expected to further boost agriculture and rural demand. Buoyancy in the services sector, coupled with steady employment conditions, supports domestic consumption. The rationalisation of GST rates is expected to give an additional lift. While the high tariff imposed by the US poses downside risks, it is heartening that the growth forecast is high. The service sector — particularly construction and trade — is expected to shoulder much of the growth load.

However, the MPC flagged that the global environment remains uncertain, with trade disputes, volatile commodity prices, and geopolitical tensions still weighing on India’s growth outlook. Inflation has remained above respective targets in some advanced economies, posing fresh challenges for central banks as they navigate the shifting growth–inflation dynamics. RBI Governor Sanjay Malhotra struck a cautious note when he said that the neutral stance would continue as the uncertainty over tariffs was still evolving and a monetary policy transmission was underway. The pause decision may also be suggestive of the MPC keeping its powder dry, should things worsen on the trade and tariff front. The impact of the 100 basis point rate cut since February this year on the economy is still unfolding. The effects of liquidity injection are trickling in slowly, and the returns, so far, are modest. On balance, the current macroeconomic conditions, outlook, and uncertainties call for continuation of the neutral stance and wait for further transmission of the front-loaded rate cut to the credit markets and the broader economy. The RBI lowered the expected inflation for FY26 to 2.6 per cent from 3.1 per cent. The policy essentially opens the door for potential rate cuts in the future. Lower retail inflation gives comfort to the RBI to reduce the rates in the coming months, and if other factors are also conducive, the central bank can consider a rate cut. Since external headwinds can complicate the path forward, it is appropriate to maintain patience now.

---