Editorial: RBI’s cautious stance

RBI pause reflects a wait-and-watch approach amid global uncertainties and the impact of the previous rate cuts

The Reserve Bank of India’s decision to keep the repo rate unchanged at 5.5 per cent and adopt a neutral stance is very appropriate in the present times of global uncertainties, further accentuated by United States President Donald Trump’s whimsical tariffs. The unanimous decision was taken at the Monetary Policy Committee (MPC) meeting, held every two months to draw up the central bank’s financial strategy. The pause mode suggests that the RBI is cautiously awaiting global factors to play out and also the impact of the previous rate cuts. The announcement follows three consecutive rate cuts since February, totalling 100 basis points, and comes just ahead of the festive season. Even while highlighting the concerns around the external sector, the central bank has chosen to keep the GDP growth projection for FY26 unchanged at 6.5 per cent. While the high tariff imposed by the US poses downside risks, it is heartening that the growth forecast is unchanged. Moreover, there are factors like a healthy, normal monsoon, lower inflation, and lower income tax burden that would be supportive of growth. The service sector — particularly construction and trade — is expected to shoulder much of the growth load. It appears that the bar for rate cuts ahead is set very high, with inflation likely to trend higher post the near term favourable trends. 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. Lending and deposit rates have not eased as much as the repo rate. The money market, in contrast, has been quick to pass them on, encouraging borrowing by corporates. Despite sharply lowering its inflation forecast to 3.1 per cent from 3.7 per cent earlier, RBI’s decision to keep rates steady emanates from its focus on one-year-ahead expected inflation that is looking comfortably above 4 per cent, while growth in its view has held up well, despite global uncertainty. While the Consumer Price Index (CPI)-based inflation has eased more than expected, an upturn is likely in the second half of this fiscal due to the upcoming festive season, easier monetary policy propping up demand and an expected statistical uptick from the low base of last fiscal. Since external headwinds can complicate the path forward, it is appropriate to maintain patience now.

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