Unambiguous commitment: MPC wants the disinflation process to be completed

Monetary policy committee's shift offers flexibility but no signal of rate cuts; RBI Governor highlights inflation and stability as key priorities

The monetary policy committee (MPC) of the Reserve Bank of India (RBI), which reviewed the policy with new external members this week, decided to leave the policy repo rate unchanged at 6.5 per cent. The MPC, however, decided to change the policy stance to “neutral” from “withdrawal of accommodation” to give itself more flexibility as was expected by some market participants. But the shift should not be seen by the financial market as an indication of a policy-rate cut in the December meeting. While some large central banks, including the US Federal Reserve, have reduced policy-interest rates, the policy resolution of the MPC and the statement by RBI Governor Shaktikanta Das have clearly indicated the Indian central bank is willing to wait for the disinflation process to get completed.

The reasoning for leaving the policy rate unchanged and shifting the stance was well communicated by the RBI. Although the inflation outlook has become more favourable, the MPC is not willing to jump the gun simply because other large central banks have reduced policy rates and have indicated further easing. Although the headline inflation rate declined in recent months, partly because of the base effect, it is expected to pick up for September, again because of the base effect. The trajectory is expected to soften in the fourth quarter this financial year on the back of higher farm output in the kharif season. A good monsoon and higher reservoir levels will also support rabi output. Since the headline inflation rate is being largely driven by higher food prices, an increase in output is expected to moderate the pressure. The MPC expects the inflation rate to average 4.5 per cent this financial year. It expects the rate to moderate to 4.3 per cent in the first quarter next financial year.

Since monetary policy is forward-looking and works with a lag, the rate decision will depend on the projections for the next financial year. The baseline inflation projection of the RBI, as shown in the Monetary Policy Report — released alongside other policy documents on Wednesday — for the fourth quarter of 2025-26 is 4.1 per cent. Since the number is close to the target of 4 per cent, it may open up space for easing in the coming months. However, it would again depend on various factors. Uncertainties in this context have only increased over the past few weeks. Geopolitical tensions could significantly affect supply chains with implications for inflation outcomes. Since the MPC expects growth to remain robust, it gives the committee the comfort to wait and watch the unfolding situation. The change in stance gives the MPC the option of quickly acting in case the global economic and financial conditions deteriorate significantly.

Aside from the policy decision, there were at least two other announcements by Mr Das that are worth highlighting here. First, some non-banking financial companies are chasing higher return on equity. In the process, lending standards and customer service seem to be getting compromised, which can pose financial-stability risks. The RBI has done well to suggest a review of incentive structures in such institutions. Second, in the context of climate change, which can pose financial-stability risks, the RBI has proposed to create a data repository. This will help regulated entities undertake climate-risk assessments. Although the way this initiative moves forward will be worth watching, the idea must be welcomed.