In its rate pause, the RBI seems to have spelt out multiple messages. While the repo rate remains unchanged at 5.5 per cent after the unanimous decision by all members of the Monetary Policy Committee to hold while retaining the stance at neutral, the two important leading indicators offered by the central bank are in its growth and inflation projections, that too at the far end of its guidance spectrum.
As was broadly expected, the RBI lowered the retail inflation forecast from 3.7 per cent on average for this fiscal to 3.1 per cent, but there is now a new number for the first quarter of the next financial year – Q1 2026-27 – at 4.9 per cent. This is sharply trending upwards. On GDP growth, while the RBI has retained the forecast for the current fiscal at 6.5 per cent, the more important number could be the 6.6 per cent projection for the first quarter of the next fiscal. Putting these two forecasts together, the underlying subtext can be interpreted as economic growth perhaps not needing any further help from the monetary policy side when it is anyway projected to go up. Inflation trending upwards going forward could mean more caution for the central bank, given the RBI’s primary focus on price stability.
Front-loaded cuts need to run its course
The more pertinent message could be that on the monetary side, what could be done has largely been executed. The 100 basis points (bps, or one hundredth of a percentage point) cut in benchmark lending rates since the central bank started this rate cutting cycle now leaves room for perhaps one more cut of 25 bps, possibly in October. This, too, is looking optimistic at this point. Credit growth, meanwhile, is still muted, despite the rate cuts. RBI views the 100 bps of rate cuts so far in 2025 as ‘front loaded’ in nature, given that it has happened over a short span of four months, and transmission is still happening.
Since the external situation is still evolving and monetary policy transmission is underway, the RBI has maintained that the impact of trade uncertainties are difficult to predict going forward and it might be pertinent to look at incoming trend and data before taking a call. Also, on growth, since the RBI has already reduced its projection for this fiscal from its initial forecast of 6.7 per cent to 6.5 per cent, some of the uncertainties have already been factored in. More uncertainties are now looming and, from the central bank’s perspective, it might be better to wait for clarity before factoring that in.
Focus on fiscal policy
The onus of the heavy lifting needs to shift back to the fiscal policy side, especially in countering the external threats emanating from US President Donald Trump’s belligerent tariff threats. On its part, the RBI will also be announcing the new monetary policy framework shortly, with the current flexible inflation targets up for review and valid till March 2026.
Also, while a 25 bps cut has been factored in for later this year, what the RBI seems to be signalling is that for the better part of the next 12-15 months or so, it is unlikely to hike rates. But on more potent measures to push growth, it is perhaps up to the government to do something. Also, it is fiscal policy that is seen to be better at calibrating and responding to the uncertainties stemming from the external front. Already, some sort of scheme to help exporters is likely on the cards, but there needs to be more of that kind of targeted support, if there is enough fiscal firepower left for the year.
The other consideration, from the RBI’s perspective, would be to safeguard household savings, which have been coming down. Alongside loan growth, the central bank has to also look at the interest of depositors, and given that monetary policy transmission happens with a lag, the impact of a rate cut on depositors needs to be calibrated alongside the potential impact on loan growth. Financial savings would come down if the central bank keeps on cutting rates. That could have its own consequences.
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On inflation, too, the RBI’s view seems to be that since food is the most volatile component in headline inflation, core inflation is a better indicator, given that it is relatively devoid of volatility. Also, despite the uncertainties on the external trade front, given the significant share of food and non-tradables in the CPI basket, the impact of external factors such as tariff changes on headline inflation should be muted going forward.
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