The Reserve Bank of India (RBI) has clearly taken a stand to support economic growth with its second 25 basis point repo rate cut this year, bringing the current repo rate to 6%.
The shift to 'accommodative' signals an easy monetary policy aimed at stimulating economic activity, bolstered by a 'decisive improvement in inflation outlook', as the Governor put it, and alignment with the RBI's target of 4% inflation.
Overall, the RBI suggests that maintaining 6% or higher 'non-inflationary GDP growth' is the primary goal, while keeping a close eye on how global economic uncertainties affect India over time, in the hope that they will not have a significant impact.
With inflation expected to be low, the RBI Governor appeared to be quite clear in his outlook: continue to support growth, especially at a time when global volatility is high due to the tariff war, which may dampen overall economic growth expectations. The RBI's hand is also forced by the fact that India's GDP for Q4FY25 is expected to be slightly lower at 6.3 percent, and overall growth for FY26 is being revised downward to 6.5 percent from 6.7 percent (in the February policy). In light of these developments, the Monetary Policy Committee (MPC) has unanimously decided to cut interest rates, providing a much-needed boost to India's economy.
The Governor's confidence stems from the fact that inflation appears to be steadily aligning with the central bank's comfort zone of 4% over the next 12 months - a scenario that may persist for several quarters unless food inflation rises sharply. In recent months, headline inflation has moderated due to a sharp correction in food inflation, which may continue due to an improving agricultural production outlook and sufficient reservoir levels. The price of crude oil has already dropped significantly, which has helped inflation.
Furthermore, improving agricultural prospects will undoubtedly boost rural incomes and demand, resulting in higher capacity utilisation and increased corporate investment. With the government's infrastructure spending picking up, the economy must recover lost ground by mid-FY26. Against this backdrop, merchandise exports are likely to be hampered by global uncertainties, while services exports may remain resilient. Overall, the calculations indicate that global outlook challenges may have little impact on domestic inflation.
The current real interest rate scenario further supports the decision to cut rates. With the repo rate at 6% (after the April rate cut) and inflation expected to be around 4%, the real interest rate is close to 2%, allowing the RBI to lower rates further. This is a positive sign for the economy because it shows that the RBI is committed to maintaining GDP growth while keeping inflation within a comfortable range.
The shift to 'accommodative' is also a significant step, demonstrating the RBI's intention to maintain an easy monetary policy aimed at stimulating growth and economic activity. This shift in stance is expected to have a positive impact on the economy, boosting growth while mitigating downside risks.
In terms of systemic liquidity, the RBI has stated unequivocally that liquidity is an operational tool for ensuring policy transmission rather than a policy tool. The recent announcements and actions taken by the central bank demonstrate a proactive approach to liquidity management, ensuring that policy transmission occurs at the ground level. The assurance of adequate liquidity will have a positive economic impact, ensuring that the benefits of monetary policy decisions are transmitted to the real economy more quickly and efficiently.
Given the current global challenges, including recent trade tariffs that could lead to a global slowdown, a GDP growth rate of 6.5 percent may be overly optimistic. Furthermore, we are seeing divergent views from central banks, particularly the US Fed, on inflation, GDP growth, and interest rate revisions. As a result, the RBI's immediate priority will be to ensure that the repo rate cuts are quickly absorbed by the economy, thereby supporting consumption and growth.
As Benjamin Franklin once said, "Without continuous growth and progress, words like improvement, achievement, and success have no meaning." India requires a long-term, balanced growth-inflation trajectory to support a stable economic expansion and financial stability. The RBI currently has enough tools and room to get us there.
