A balanced policy that did not yield a rate cut
The Reserve Bank of India’s latest monetary policy decision was broadly balanced. RBI’s monetary policy committee (MPC) clearly outlined both the upside and downside, signalling a nuanced and carefully considered approach.
Although the majority did not expect any rate cut—particularly after the recent large reduction and given the neutral stance amid global uncertainties—I was still hoping for a cut.
Although front-loading of the rate action has already occurred, if conditions remain benign, there’s no harm in continuing support. The recent cuts need not preclude further action if the macro environment justifies it.
As for the ‘neutral’ stance, post 2013-14, markets have tended to interpret it chiefly as a signal on liquidity, whereas earlier, it reflected flexibility to act both ways—accommodative (a cut) or neutral (open to either direction depending on data). RBI governor Sanjay Malhotra reiterated this flexible interpretation in a recent interview, clarifying that the ‘neutral stance’ wasn’t a constraint.
The governor also said that “geopolitical uncertainties have somewhat abated, even though global trade challenges continue to linger”. If global trade risks increase, supporting domestic growth becomes even more important, which could justify further easing.
On the data front, while hope for a cut existed, RBI held steady. The central bank’s GDP forecast remains unchanged from last time, but its inflation projection has improved.
RBI lowered its inflation forecast for the ongoing July-September second quarter from 3.4% to 2.1%, and for the third quarter from 3.9% to 3.1%. It also reduced its inflation forecast for 2025-26 from 3.7% to 3.1%.
However, the surprise was RBI’s inflation projection of 4.9% for the first quarter of FY27. The governor attributed this mainly to volatile food prices, especially vegetables. While this may be a blip, it’s a significant number that the MPC could not ignore.
In short, while the reduced inflation forecast for the immediate future could have justified a rate cut, the long-term projection of 4.9% for Q1 FY27 acted as a major deterrent. This forecast, along with the impact of previous cuts on demand, likely stayed the MPC’s hand.
The market will be keenly watching for any revisions to RBI’s inflation projections. If the forecasts for Q4 FY26 and Q1 FY27 are reduced in the next policy meeting, we might see the door open for further rate cuts. Until then, bond yields are likely to remain in a trading range, reflecting this balanced policy outlook.
On developmental and regulatory policies, the regulator introduced auto-bidding facilities in RBI Retail Direct for investment and re-investment in treasury bills. This would be like a systematic investment plan (SIP) investment in government securities and treasury bills, which can be built over time for individuals.
While this would be a small step in easing retail investment in government securities and treasury bills, much more needs to follow to make this widely accepted. RBI and the government are quite focused on developing this market.
RBI also announced standardisation of the procedure for the settlement of claims for deposit accounts of deceased bank customers. This is a step towards making life easy for people, but again, we need a lot to follow through.
Most importantly, we need to have a central KYC (know-your-customer) process so all banks and regulated entities can obtain customers’ consent and access their details from a central repository. As a country, we are spending a humongous amount of human resources on something that can be easily managed.
Jayesh Mehta is vice-chairman and chief executive officer, DSP Finance Ltd
Post Comment