A 'placeholder' monetary policy underscores RBI's wait-and-watch approach

In the first week of December, Reserve Bank of India (RBI) Governor Sanjay Malhotra played Santa Claus and brought an early Christmas. The central bank cut the policy rate by 25 basis points (bps) and committed to injecting substantial liquidity into the system through the so-called open-market operations (OMO) and dollar-rupee buy-sell swaps.

 

After that, the last policy of the current financial year – the first one after the Union Budget – was a non-event on Friday. And rightly so. As they say, “if it ain't broke, don’t fix it”. We can call it a “placeholder policy”.

 

At the end of the three-day meeting of the Monetary Policy Committee (MPC), the Indian central bank’s rate-setting body, the policy rate remained unchanged at 5.25 per cent, and the stance stayed “neutral”.

 

The decision for the status quo on the policy rate was unanimous. As for the stance, one of the six MPC members, Ram Singh, held a different view, favouring a change to “accommodative”.

 

The status quo on both rate and stance was in sync with market expectations. Still, the 10-year bond yield rose from 6.65 per cent to 6.74 per cent, as some market participants expected liquidity measures. There was a demand even for a cut in banks’ cash reserve ratio.

 

The RBI refrained from doing so. What’s the hurry? Daily average system liquidity has been a surplus of around ₹70,000 crore since the last MPC meeting in the first week of December 2025. Right now, the surplus is at least ₹2 trillion.

 

Even though no specific liquidity measure was announced, Malhotra’s statement read: “Going ahead, the RBI will remain proactive in liquidity management and ensure sufficient liquidity in the banking system to meet the productive requirements of the economy and to facilitate monetary policy transmission. Liquidity management would be pre-emptive, with sufficient allowance for unanticipated fluctuations in government balances, changes in currency in circulation, forex intervention, etc.”

 

On expected lines, the RBI raised its real gross domestic product (GDP) growth projections for the first quarter of FY27 from 6.7 per cent to 6.9 per cent and for the second quarter from 6.8 per cent to 7 per cent.

 

The GST rationalisation, a buoyant services sector, monetary easing, and benign inflation should support private consumption, even as exports could benefit from the proposed trade deals with the US, the European Union, New Zealand and Oman.

 

The RBI has raised its retail inflation projections, too. The consumer price index (CPI)-based inflation rate for FY26 is now estimated at 2.1 per cent, with the fourth-quarter rate at 3.2 per cent. The CPI-based inflation rate for the first quarter of FY27 is projected at 4 per cent, and for the second quarter at 4.2 per cent.

 

In December, the RBI had projected the retail inflation rate for FY26 at 2 per cent, down from the 2.67 per cent estimated in October. That was the fourth time that the RBI had pared its inflation estimate. The estimate at the time was 3.9 per cent for the first quarter of FY27, and 4 per cent for the second.

 

The central bank would release the full-year GDP growth and CPI-based inflation projections in its April policy.

 

With retail inflation estimated at 4 per cent in the first quarter of FY27 and 4.2 per cent in the second, one could expect a long pause on the policy front. If the CPI-based inflation print runs in line with RBI projections in the first half of FY27, at the current policy rate, the real rate will be slightly over 1 per cent. In his post-policy media interaction, Malhotra was heard saying that there might be no change in the policy rate in the next nine months to a year.

 

Between February and December last year, the RBI pared the policy rate from 6.5 per cent to 5.25 per cent.

 

In December, Malhotra spoke about the “real Goldilocks period” in the Indian economy. What's his take on the Indian economy this time around? It remains in the same “sweet spot or even better”, as underlying inflation continues to be benign, while the growth impulse is becoming stronger. The growth-inflation dynamics at this point call for no action. The RBI will wait and watch how things unfold while ensuring there is enough liquidity in the system for productive purposes and monetary transmission across all markets.

 

Beyond monetary measures, the RBI has used this policy meeting to push for a few other things, including customer protection, which is fast emerging as the central theme of the Indian financial system.

 

The central bank will issue three draft guidelines – related to mis-selling of financial products, recovery of loans and engagement of recovery agents, and limiting the liability of customers in unauthorised electronic banking transactions. The plan is to introduce a framework to compensate customers for losses of up to ₹25,000 from small-value fraudulent transactions. It will also publish a discussion paper on possible measures to enhance the safety of digital payments, particularly for senior citizens.

   

The writer is an author and senior advisor to Jana Small Finance Bank Ltd.

His latest book: Roller Coaster: An Affair with Banking.

To read his previous columns, log on to www.bankerstrust.in.

X: @TamalBandyo