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In a decisive move, the RBI MPC cut the repo rate by 25 bps to 6.25%, citing easing inflation and slowing growth, while maintaining a ‘neutral’ stance to navigate global uncertainties and evolving trade dynamics. With inflation projected at 4.2% for FY26 and growth at 6.7%, the RBI aims to balance real interest rates around 150 bps, potentially paving the way for further cuts to a terminal rate of 5.75%. The central bank’s proactive liquidity measures, including repo auctions and OMO purchases, are expected to ensure smoother transmission of rate cuts, supporting growth amid external challenges. My critical reading of this is that while the rate cut is a welcome step to stimulate growth, the RBI’s cautious ‘neutral’ stance and reliance on inflation projections may limit the scope for aggressive monetary easing. The MPC’s decision to remain watchful of global financial market volatility, geopolitical tensions, and adverse weather events underscores the fragility of the current recovery. However, the RBI’s emphasis on maintaining a durable alignment of inflation with the 4% target, while supporting growth, appears overly conservative given the tepid industrial growth and persistent drag from external headwinds. The projected GDP growth of 6.7% for FY26, though optimistic, hinges on favourable rabi prospects and a recovery in private consumption, which may be undermined by global trade uncertainties and commodity price volatility. Thus, the RBI’s approach, while prudent, risks being reactive rather than proactive in addressing the structural slowdown in growth.”
