No rate cut? Why the RBI’s ‘hawkish pause’ could still be good news for markets

For investors, the takeaway is that the RBI is holding back its firepower until it’s needed — and the prospect of easing later in the year may still be on the table.

The Reserve Bank of India’s Monetary Policy Committee (MPC) kept policy rates unchanged, delivering what economists may brand as a “hawkish pause.” At first glance, the decision may disappoint those hoping for rate relief. But its outlook for the next year certainly gives some reason to cheer.

GDP growth projections for the current fiscal year were left unchanged, a move widely expected given the persistent global uncertainties. But surprise, surprise — the MPC pegged its forecast for the first quarter of FY27 at 6.6 percent, higher than the 6.5 percent projected for FY26.

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That signals stronger confidence in the economy’s momentum heading into next year. Inflation projections for FY26, on the contrary, have been cut to 3.1 percent from 3.7 percent earlier, though for the first quarter of next fiscal, it has been pegged at 4.9 percent. Most economists also feel inflation won’t stay down for too long and, in fact, depending on how Trump tariffs settle, there could be a risk of higher inflation — something the MPC recognises in its projections.

So, here is the broad picture: if we have consumer inflation running at close to 5 percent, there is no case for the repo rate, which is already just a quarter percentage point above the projected inflation, to be cut much from hereon. Rates should at least cover inflation, so savers do not stand impoverished (not that we have not had long periods of negative “real rate” in the past!).

More importantly, rate cuts are an ammo for central banks to trigger growth by making credit enticing for borrowers. And if growth is not suffering, there is no need to cut rates anyway.

Also read: MPC meeting: RBI cuts FY26 inflation forecast to 3.1% from 3.7%

At the same time, the reality today is that credit growth is in single digits, and that is not because credit is expensive but because there is fear and uncertainty on several counts. Apart from the risk of Trump tariffs — which will eventually determine if, when, and where private capex will come up — there is fear of AI-led job losses, which could hit a cohort that usually borrows the most: home loans, car loans, and durable loans. Besides visible stress in the microfinance and MSME segments, there is also the threat of stress rising in the MSME sector.

That’s why RBI’s GDP growth forecast for the first quarter of next fiscal brings greater cheer. But, it does not take away the uncertainty.

It is the mixed feeling that the bond markets showed some disappointment, with a modest uptick in yields — the 10‑year G‑sec rose from 6.33 to 6.37 percent. But stock markets hardly moved. Bank stocks were nonchalant about the MPC announcement, with leading banks clocking less than 1 percent gains today, for it strictly means no gains or losses for banks right away — there is no scope for treasury bounties, nor can the GDP growth projection be taken as a guarantee of better credit growth. The future is always uncertain, but in today’s business climate, there is a vast array of scenarios that could play out one year out.

For now, strong growth and still‑firm inflation leave little reason to cut rates. But if the dust settles on Trump tariffs and the Fed also considers a rate cut, October could bring the first opening for a rate cut. For investors, the takeaway is that the RBI is holding back its firepower until it’s needed — and the prospect of easing later in the year may still be on the table.

Till then, for stock markets, the focus will need to be on earnings, stock by stock.