Unanimous MPC vote on rates signals stability amidst global uncertainty

Disclaimer: The author V K Vijayakumar is the Chief Investment Strategist at Geojit Investments Limited . Views are his own.

 

Indian economy has been resilient despite the many headwinds that it has been facing. Crude prices have been remaining elevated, with occasional dips, since the conflict began in West Asia on February 28.  Foreign portfolio investors (FPIs) have been relentlessly selling Indian equities to raise money for the spectacularly profitable chip trade in South Korea and Taiwan. Elevated crude prices and sustained selling by FPIs made the rupee, the worst performing currency in Asia, so far in 2026. Despite these headwinds, the Indian economy has been resilient. 

 

What explains this resilience?

 

The fiscal and monetary stimulus provided through 2025 have triggered strong consumption, particularly in the consumer durable segment of the economy. The big income tax relief provided in Budget 2025 increased the disposable income of taxpayers.  The sweeping goods & services tax (GST) cuts made many durables like automobiles cheaper and affordable. The 100 basis point (bp) cut in repo rate and the cut in cash reserve ratio (CRR) significantly reduced the cost of credit to borrowers. These fiscal and monetary stimulus measures, after a time lag, are acting on the demand side. 

 

Credit growth is now running at about 18 per cent and the automobiles sector is reporting sustained increase in sales month after month. Even though inflation has been inching up ( from 3.21 per cent in February to 4.38 per cent in June), it is within the RBI’s tolerance band. The GDP growth target of 6.6 percent for FY 27 appears easily achievable, and perhaps, exceeded under favorable conditions. 

 

Repo rate unchanged at 5.25%

 

In such a scenario, the near consensus among experts was that the MPC would hold the rates in the August monetary policy. And that was precisely what the MPC did through a unanimous decision.  Regarding the monetary stance, there was a view that the RBI might turn hawkish in the context of rising inflation and several central banks including ECB, Bank of Japan, Reserve Bank of Australia and the central bank of South Korea raising interest rates. But there was no hawkish tone in the policy;  a bit surprisingly, the tone was more dovish than expected.

 

Growth revised upwards, inflation downwards

 

The slight surprise element in the policy was the decision to raise the GDP growth rate projection for FY27 to 6.7 per cent from 6.6 per cent earlier, and to lower the CPI inflation projection for FY 27 to 5 per cent from 5.1 per cent earlier. 

 

Rationale for the ‘dovish hold’

 

Governor Malhotra sounded optimistic about the resilience of the Indian economy as reflected in robust discretionary consumption, healthy merchandise and services exports and buoyant credit demand. 

 

Also, the Governor sounded optimistic about containing inflation within the RBI’s tolerance band since core inflation excluding precious metals is benign. The sharp dip in Brent crude to below $79 on August 05 will support the Governor’s optimism in reining in inflation. 

 

The positive view of the policy regarding growth - inflation dynamics is positive from the stock market’s perspective. Higher growth and the consequent higher earnings growth, along with the return of FIIs to the Indian market, can facilitate a modest rally in markets.