RBI's MPC avoids knee-jerk reaction, preserves policy flexibility

The status quo on the key policy rates and the neutral stance maintained in the current meeting by the Monetary Policy Committee (MPC), the six-member rate-setting body of the Reserve Bank of India (RBI), was no surprise. The RBI commentary, while retaining policy flexibility amid exceptionally high uncertainty, was justifiably cautious and vigilant.

 

The RBI’s articulation of supply side shocks weighing on both price and demand — and its conscious choice to avoid pre emptive rate action — lent the current policy added significance as a meaningful reset of expectations.

 

Accordingly, the one-year overnight index swap (OIS) curve softened sharply by around 29 basis points (bps) during the day (and over 45 bps during April), as the possibility of an imminent rate hike faded significantly after today’s policy.

 

Going ahead, the growth inflation outlook is heavily contingent on the duration of the West Asia conflict and the extent of damage to energy infrastructure and cross-border economic activities. The recent two week US-Iran ceasefire and the reopening of the Strait of Hormuz are clearly positive developments, but a sustained easing of global uncertainty will hinge on concrete progress in diplomatic negotiations.

 

Even though external conditions pose a significant risk, the RBI pointed out that the pause was also cushioned by resilient momentum in domestic activity across manufacturing and services. It projected 2025-26 economic growth at 7.6 per cent, while sequentially moderating 2026-27 growth estimate to 6.9 per cent, reflecting the possible spillovers from external headwinds.

 

While headline consumer price index (CPI) -based inflation remains contained — supported by comfortable agricultural buffer stocks, strong kharif output and excise duty cuts — the RBI highlighted rising upside risks as higher energy and commodity prices impacted input costs, alongside emerging weather related risks from a potential El Niño. The central bank, accordingly, raised its 2026-27 inflation projection to 4.6 per cent, with a visible pickup expected in the middle of the year.

 

The RBI reiterated its commitment to ensuring sufficient liquidity after infusing durable liquidity of around ₹3.5 trillion through open-market operation (OMO) purchases and $20 billion in forex swaps in 2026 so far. The recent administrative measures augur well for credit flow to productive sectors like industries — weighted contribution of industrial credit to overall bank credit has started inching higher in recent months from a markedly low print about six months ago and has scope for further expansion.

 

In sum, the RBI commentary clearly acknowledged the deterioration in global growth inflation dynamics, while consciously avoiding overreaction, given the domestic economy’s comparatively resilient fundamentals. Through a demonstrably balanced policy outlook, the RBI effectively alleviated market concerns of a knee jerk response, a reassurance evident in the softening of the OIS curve. The current policy configuration thus reinforces a “wait and watch” stance, with the balance of risks tilted toward supporting growth rather than prematurely constraining it. Importantly, even in the absence of a policy rate action, the RBI retained a broad and flexible toolkit — encompassing calibrated liquidity operations, targeted prudential measures and discretionary foreign exchange interventions — allowing it to aid credit transmission, manage the rupee’s volatility and preserve orderly market conditions.

 

The author is chief economist & head of research at Bandhan Bank. The author thanks Sudarshan Bhattacharjee and Gaurav Mukherjee for assistance. Views are personal