Moneycontrol Pro Panorama| RBI pauses, but with good reason

RBI has a tough task at hand due to the inflation situation.

Dear Reader,

There were no surprises in today's policy decision. In the August 4-6 meeting, the Reserve Bank of India’s Monetary Policy Committee (MPC) chose to keep policy rates unchanged at 5.5 percent while retaining a neutral stance.

There were several positives in Governor Sanjay Malhotra’s statement on the economy and the banking system. He said the inflation outlook is benign, banking system remains healthy and non-bank sources are compensating for the decline in credit flow from banks, which is good news for the economy. That’s not all. The RBI now expects a lower than earlier projected CPI inflation for the financial year 2026, which means that a window for future rate cuts may open.

The only point of risk that Malhotra highlighted in his statement is of muddy international trade waters. When the US is waging a trade war on any country — and in this case, it's with half of the world, including India — there is reason to worry.

Higher tariffs can disturb a lot of things in an economy. For one, it can upset delicate growth-inflation trade-offs in emerging economies and can even lead to large scale unemployment. This is a play that is still unfolding and India needs to remain watchful.

However, there were those who expected a rate cut this time to hedge against the tariff war induced economic slowdown. Aparna Iyer asks in her piece whether the RBI missed the bus on policy action.

But one can’t blame the RBI; it has a tough task at hand due to the inflation situation as outlined in this Chart of the Day.

Yet, Governor Malhotra’s remarks paint a picture of cautious optimism, reflecting a central bank that is neither complacent nor impulsive. This wait-and-watch approach is a calculated move, rooted in the need to gauge the full impact of prior rate actions.

The impact of the 100 basis points (bps) rate cut from earlier policies is still unfolding.

The RBI’s acknowledgment that transmission of these cuts is ongoing — evidenced by at least an average 55 bps reduction in bank lending rates — suggests a deliberate pause to allow the financial system to absorb and reflect these changes.

With system liquidity already robust at an average surplus of Rs 3 lakh crore per day, bolstered further by the recent CRR cut, the RBI is clearly prioritising stability over hasty adjustments.

Thus, if one reads between the lines, such a measured approach is not about inaction but about ensuring that the economy reaps the full benefits of prior interventions before charting the next course.

India’s economic landscape, as outlined by Malhotra, supports this cautious stance. The monsoon’s promising progress and resilient rural consumption provides a sturdy foundation, even as urban consumption remains tepid and growth across sectors appears uneven.

The projected real GDP growth of 6.5 percent for FY26 signals confidence in the medium-term outlook, but the RBI is acutely aware of looming challenges.

Inflation, expected to rise from Q4 this financial year, and projected at 3.1 percent for FY26, down from 3.7 percent projected in June, introduces a layer of complexity.

There are multiple variables in charting the course of inflation, including monsoon and external headwinds.

It is precisely these global trade headwinds and evolving tariff uncertainties that further complicate the picture, nudging the RBI to hold its ground until clearer signals emerge. As my colleague Neha Dave writes, “overall, heightened uncertainty around global trade policies is likely to create volatility in capital flows and exchange rates, which could in turn impact inflation, the real economy, and financial stability”.

The external sector offers some comfort, with a declining current account deficit driven by robust exports and strong remittances.

Yet, the RBI’s focus on financial stability — evidenced by healthy bank metrics like a 17 percent Capital to Risk-Weighted Assets Ratio (CRAR) and a 78.8 percent credit-deposit ratio — augurs well for the system.

By maintaining a neutral stance, the RBI is keeping its options open, ready to pivot if inflationary pressures intensify or growth falters. For now, patience is the RBI’s sharpest tool.

Until next time! 

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Dinesh Unnikrishnan
Moneycontrol Pro