RBI monetary policy: Laser-focused on supporting economic growth

The policy actions of the RBI over the last few months has shown a clear focus on supporting growth. The central bank has unleased rate cuts, liquidity gush as well as easing of macroprudential norms to support growth. Policy rate are 50 basis points (bps) lower with back-to-back rate cuts since February. The effective rate cuts are closer to 75 bps with overnight rates closer to SDF, which is the lower-end to the policy rate corridor. Even more significant has been the durable liquidity infusions measures, taking both analysts and the markets by surprise. 

To give context to the significant turnaround in liquidity conditions, the RBI has purchased government bonds worth ₹5.23 trillion spread-over December 2024-end to May 2025. The speed of the infusion has been even faster than the response to Covid-19 shock, where the similar quantum of OMO purchases took 12 months. Macro prudential norms is another key piece of policy support with the RBI gradually reversing the tightening in regulation, such as bank lending to NBFCs or delaying implementation of LCR regulation for retail deposits with internet and mobile banking.  

This laser-focused clarity on being growth supportive is derived from comfort on inflation. Headline CPI inflation has stayed below the 4 per cent-target since February, which also coincides with when the rate cutting cycle began. As monetary policy is forward looking, inflation outlook is more important. On this front too there is considerable comfort post the broad-based slowdown in food inflation. Within the food basket, on a CPI weighted basis only 14 per cent of the items saw inflation higher than 6 per cent. Only a year back this figure was 57 per cent of the food basket. Meanwhile, core inflation, which is influenced by demand rather than supply-side factors, has been subdued for two years. The persistent softness in core-core reflects, presence of negative output gap, reducing risk of economy overheating. 

  Coming to growth, the RBI’s assessment remains positive be it consumption or investment. FY25 GDP growth came in line with advanced estimates of 6.5 per cent, with growth led by consumption and investment. As monetary policy is forward looking, FY26 GDP growth outlook is more important. Potential headwinds to growth stem from tariff uncertainty, slowdown in urban consumption and private corporate capex. The uncertainty created by the tariffs has likely impacted global growth with producers putting capex plans on hold, awaiting clarity.  Domestically, urban consumption has slowed due to moderation in urban wage growth and reduction in household savings buffer. The slowdown in wage growth is led by moderation in company profit growth as input cost rose in FY25. Meanwhile, household savings buffer created during the Covid-19 shock has been used up with household savings as proportion of GDP reducing below pre-pandemic levels. The uncertainty on demand both domestic and external is likely to keep corporate capex tentative. Tailwinds for growth will come from normalisation in government expenditure pattern as FY26 is not an election year and robust rural demand provided monsoon is normal. 

Externally, the situation is supportive for policy easing with the pressures of impossible trinity reducing due to dollar weakness. Last year, the RBI was in the throes of the impossible trinity with a strong dollar and a slowdown in capital inflows. This has changed with the markets ques­tioning US exceptionalism due to tariff escalation and worsening fiscal metrics. Depreciation pressure on rupee has reduced, providing the RBI policy space to focus on domestic factors.  

The course is set for the RBI to ease policy rates by 25 bps in June policy and retain accommodative stance. Looking beyond the June policy, we see space for further rate cuts, with terminal repo rate reaching 5.25 per cent in FY26. 

The writer is chief economist at IDFC First Bank