Mint Road signals watchful pause

RBI joins several major global central banks that have become cautious in easing rates further in recent months amid elevated global uncertainties

A pause it is.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) stood pat on Wednesday, maintaining the repo rate at 5.5% and the stance at neutral after frontloading cumulative rate cuts of 100 basis points (bps) between February and June this year.

With this, the RBI joins several major global central banks that have become cautious in easing rates further in recent months amid elevated global uncertainties, and their uncertain impact on growth and inflation.

The MPC’s decision, a unanimous one, was based predominantly on two domestic trends.

One, the transmission of the repo rate cuts to the economy needs speeding up, particularly in the credit markets, to provide a broader leg-up to economic growth.

Second, the optimism on inflation has so far been justified but its outlook warrants caution.

To be sure, the current easing cycle is transmitting better than in 2019.

Between February and July, with a 100-bps cut in the repo rate, money market rates fell 120–160 bps, but banking system lending rates have been slower to adjust.

The reason for this is improved liquidity management via several tools available with the RBI, including the variable rate auction mechanism. Liquidity is also in greater surplus compared to 2019.

According to an internal working group of the RBI — cited by the Governor Sanjay Malhotra in his monetary policy review statement — these tools have ensured that the weighted average call rate (WACR) closely tracked the overnight money market rates.

Put another way, effective liquidity management has complemented the rate cuts to ensure better transmission to lending rates.

Though there has been a swift reduction in the money market rates, bank lending rates have not eased to the same extent as the repo rate, so far. This suggests the impact of past rate cuts is yet to play out fully. This lag is the reason the MPC decided to pause.

Second, while inflation based on the Consumer Price Index (CPI) has eased more than expected, an upturn looms in the latter part of this fiscal for three reasons: the upcoming festive season, easier monetary policy propping up demand over the months and an expected statistical uptick from the low base of last fiscal.

The MPC slashed its inflation estimate for this fiscal by 60 bps to 3.1% after food prices corrected more than expected. The committee acknowledged that the inflation outlook for fiscal 2026 has turned more benign than expected, given the sharp slide since the previous policy meeting.

But it is cautious of the imminent, gradual uptrend in the inflation trajectory. The MPC expects inflation to cross its 4% target from the January-March 2026 quarter and rise towards 5% during the April-June 2026 quarter. Given its forward-looking approach, it has chosen to remain data-dependent before easing monetary policy further.

The MPC’s announcement was in line with our expectations. We agree the impact of past rate cuts will continue to unfold. The Governor assured that liquidity conditions will remain conducive for the transmission of past rate cuts to broader market interest rates. Systemic liquidity has been in surplus since the start of this fiscal till July.

The 100-bps cut in the cash reserve ratio between September and December 2025 will further help maintain adequate liquidity.

Lower interest rates should start supporting growth, especially in the urban areas, towards the latter part of this fiscal. In the meanwhile, strengthening rural consumption, buoyed by healthy rain and strong agricultural incomes, and government spending on public construction, have been supporting growth so far. These buffers have brought resilience to India’s gross domestic product growth amid adverse global tides.

We expect growth, therefore, to come in at around 6.5% this fiscal (in line with the MPC’s forecast). But in our view, risks are tilted to the downside on account of the direct and indirect impact of higher US tariffs.

The sharp fall in inflation in the past few months has been driven by food, particularly vegetables and foodgrains, and also supported by a favourable base effect. As the base effect wanes, food inflation is likely to edge up in the second half of the fiscal.

Nevertheless, healthy agricultural production is expected to keep food inflation in check. The distribution of rainfall and extreme weather events remain monitorable.

Non-food inflation is also likely to remain in the comfort zone assuming low crude and global commodity prices. We expect Brent crude at $60-65 per barrel on average this fiscal. We expect CPI inflation to average 3.5% this fiscal, lower than last fiscal’s 4.6%. Prudence is also required in a volatile global environment and its impact on imported inflation via a weaker rupee. 

In a world marked by uncertainty, anchoring expectations and a data-driven policy approach remain key to preserving macroeconomic stability.

(Dipti Deshpande is Principal Economist and Pankhuri Tandon is Senior Economist at Crisil.)

Views are personal and do not represent the stand of this publication.