ANALYSIS RBI holds repo rate steady: Are we in for a long pause?

RBI Governor Sanjay Malhotra

One would have expected some cautious or concerned commentary from Reserve Bank of India’s Governor, Sanjay Malhotra, when he delivered his post-Monetary Policy Committee (MPC) speech on Wednesday, just days after the United States imposed a 25 percent tariff on India. That was barely the case, even when he addressed the media after the conference. Despite drilling him on this aspect multiple times and in different ways, Malhotra’s response was almost a one-liner: that the MPC would have to assess incoming data points to project the further trajectory of rate cuts.

This signals two things -- the MPC is confident that India will weather the steep tariff and deliver 6.5 percent GDP growth in FY26, and what had to be done to provide the impetus for growth is already done. This is quite contrary to what the Street had anticipated -- a 25 bps reduction in the repo rate if one were to factor in a consequent 30 bps decline in GDP.

What comes next may be a phase of pause, whether long or short will likely depend on two factors -- are the global uncertainties (tariffs and prolonged geopolitical tensions) impacting growth, and is the economy growing at the anticipated pace of 6.5 percent? What would also be interesting to see is whether banks have the comfort to further trim lending rates to accelerate the pace of growth.

To be sure, the 100 bps rate cut so far has translated to 71 bps on the lending side (of which 55 bps is reflected as pure interest rate reduction) and 87 percent on the deposits side. This pace of rate transmission is faster and qualitatively better than what we saw when banks migrated to the external benchmark lending rate in 2019. Normally, it might take 4-6 months for rate cuts to convert into demand. This time around, despite a front-loaded cut, demand is yet to be brisk.

What should be of concern is the Governor’s specific mention about discretionary spending being tepid. This might once again exert pressure on government spending, which has recently seen recovery on the capex front.

Ironically, a year ago, inflation was the horse or elephant (words often used to describe inflation by the previous Governor) to tackle. Now it’s growth -- a factor which has far more variables. Nonetheless, as yet, from a monetary ammunition perspective, the RBI is in a sweet spot where it can afford to wait and watch.

But hopefully, we don’t get into a cycle where tariffs may have some impact on growth, which could in turn limit the appetite for consumers to borrow from banks. That could complicate decision-making for the MPC  -- there might be a need for a rate cut, but can that lift growth?