Status quo on policy: Is this the end of the Reserve Bank's easing cycle?

With the rise in inflation from the fourth quarter, possibility of another rate cut uncertain, unless growth plays spoilsport

The Reserve Bank of India’s (RBI’s) actions in its August monetary policy were on expected lines.

 

After a cut of one percentage point in the policy repo rate in three tranches — between February and June — the Monetary Policy Committee (MPC), the six-member rate-setting body of the RBI, on Wednesday decided to leave the rate unchanged at 5.5 per cent. The “neutral” monetary policy stance was also kept unchanged. Both these MPC decisions, announced after a three-day meet, were unanimous.

 

The RBI had changed its stance from “accommodative” to “neutral” after cutting the policy rate by half a percentage point in June.

 

On Wednesday, it also left its gross domestic product (GDP) growth estimate for 2025-26 (FY26) unchanged at 6.5 per cent, but again pared sharply its projection for the consumer price index (CPI)-based inflation rate for the year — from 3.7 per cent to 3.1 per cent. In June, it had reduced it from 4 per cent to 3.7 per cent.

 

The governor’s statement said the current macroeconomic conditions, outlook and uncertainties called for a continuation of the current policy rate and a wait for further transmission of the “frontloaded” rate cuts to the credit market and the broader economy.

 

After the policy, the yield on the 10-year government bond rose 9 basis points on Wednesday to 6.42 per cent, amid a view that the easing cycle might have ended. The rupee appreciated marginally against the dollar to 87.73 (from 87.80). The equity market saw little change, with the Nifty50 closing at 24, 574.20, down 0.3 per cent from its previous close.

 

Before the June policy, the 10-year bond yield stood at 6.19 per cent, and one dollar fetched ₹85.63.

 

Driven by food prices, retail inflation undershot the RBI projection in the first quarter of FY26, but the so-called core inflation (non-food, no-oil inflation) remained steady at around 4 per cent. Going by the latest estimate, the core inflation rate is likely to stay moderately above 4 per cent during the year, but the overall CPI-based inflation for FY26 is projected at 3.1 per cent — 2.1 per cent in the second quarter, 3.1 per cent in the third, and 4.4 per cent in the fourth. For the first quarter of FY27, the CPI-based inflation rate is projected at 4.9 per cent.

 

When it comes to growth, the RBI sees too many uncertainties — from tariff tantrums and trade negotiations to geopolitical tensions. Still, it has kept its FY26 real GDP growth estimate unchanged at 6.5 per cent — 6.5 per cent in the first quarter, 6.7 per cent in the second, 6.6 per cent in the third, and 6.3 per cent in the fourth. The real GDP growth rate for the first quarter of FY27 is projected at 6.6 per cent.

 

In April, the RBI had cut its FY26 GDP growth projection from 6.7 per cent to 6.5 per cent.

 

The RBI has committed to remain nimble and flexible in its liquidity management. The plan is to maintain “sufficient” liquidity in the banking system to meet the demand of the economy and ensure the transmission of past rate cuts in the money and credit markets.

 

The reduction of one percentage point in banks’ cash reserve ratio (CRR) — staggered over four instalments between September 6 and November 26 — will release ₹2.5 trillion into the system. CRR is the portion of net demand and time liabilities — a loose proxy for deposits — which commercial banks keep with the RBI. They do not earn any interest on this. If there is no dramatic pickup in credit demand, we can expect the central bank to continue with its auctions to drain out excess liquidity from the system.

 

So far, the script is fine. But what next?

 

The MPC will keep a close vigil on the incoming data and the evolving domestic growth-inflation dynamics to chart out an appropriate monetary policy path. The RBI will be “agile and proactive in providing a facilitative monetary policy, based on incoming data and the evolution of the growth-inflation dynamics.”

 

The tariff uncertainties are evolving, even as transmission of the one percentage point cut is still unfolding. Meanwhile, by the end of August, the GDP growth rate for the first quarter of FY26 will be out.

 

A section of economists had pencilled in a reduction of 25 basis points in this policy itself. That did not happen. Will it happen going forward? If yes, when?

 

That might happen only if there is a severe slowdown on the growth front. The governor’s statement did not say there was very limited space for monetary easing, but the overall tone of the policy was not as dovish as many would have expected.

 

The retail inflation rate is projected to start going up, edging above 4 per cent in the fourth quarter of FY26 and beyond, given the so-called base effect and a rise in demand as the impact of past rate cuts plays out.

 

The policy had already used the space created by the benign inflation outlook and frontloaded the rate cuts. For the time being, it’s done with the cuts. A cut in October, which many are still predicting, is not certain. Of course, if the growth nosedives, the script will be different.

 

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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