Banking Central | A rate cut looks almost certain but the MPC must not lose its nerve

The central bank is expected to lower its benchmark rate by 25 basis points on Friday, before holding steady in the subsequent quarters

This week's Monetary Policy Committee (MPC) meeting is happening at an unusual moment for the Indian economy. Growth is firm, even buoyant. Inflation has collapsed to levels nobody in Mint Street would have imagined a year ago. And the market has already priced in a 25-basis-point cut. The sense of inevitability hangs heavy. Yet this is precisely the kind of moment when central banks must be most alert to the fine print.

The dramatic softening of retail inflation in recent months has provided the immediate trigger for the current enthusiasm. Headline CPI has slipped to historic lows, aided by steep corrections in food prices and a favourable base.

For two consecutive months, inflation has hovered at levels well below the four per cent target. Much of the pressure on cereals, pulses and edible oils has eased. Core inflation remains subdued. For an MPC that spent the better part of two years battling sticky food inflation and entrenched price expectations, this is a moment of rare comfort.

Banking Central

On the other side, growth continues to surprise positively. High-frequency indicators are lively, construction and services have stay fully strong, and urban consumption is holding up. The latest GDP print, comfortably above eight per cent, tells its own story. Bank credit is growing at a healthy clip, although pockets such as MSMEs remain sensitive to borrowing costs. The broad picture, however, is of an economy that does not look tired. This combination creates the textbook setting for a rate cut.

But policy is rarely textbook. The real question is whether today’s soft inflation is durable enough to warrant a shift in stance. Food inflation can turn sharply with the next crop shock, and India’s monsoon reliability has become weaker over the years.

Fuel dynamics remain tied to global uncertainty. The so-called disinflation may well be a passing phase rather than the beginning of a structural glide path. If the MPC cuts too early and inflation rebounds, the credibility cost will be far higher than the short-term growth gain from lower rates.

There is also the matter of transmission. Banks have not fully passed on the easing of the past year. Lending rates, especially for retail and small business segments, remain significantly above pre-Covid levels. A rate cut by itself does not guarantee lower borrowing costs unless liquidity conditions and bank balance sheets align. The MPC may find it more prudent to let previous moves percolate further rather than adding fresh stimulus that could end up trapped in the transmission pipeline.

Also, major central banks still remain cautious. Crude oil is unpredictable. Trade tensions are simmering. A rate cut at home, while the US Federal Reserve stays watchful, could put pressure on the rupee at a time when external stability cannot be taken for granted.

All this does not mean the MPC will hold back. The political economy of a long disinflation spell is hard to ignore. The clamour for lower rates has grown. With a record-low CPI print, the argument for signalling confidence in the growth cycle becomes stronger. A 25-basis-point cut is the most likely outcome.