RBI Policy: Full of surprises, dovish on growth, neutral on further cuts

With inflation expected to rise back to above 4 per cent by Q4-FY26, the Monetary Policy Committee has capitalised upon the available headroom to frontload rate action

The Monetary Policy Committee’s (MPC) second bi-monthly policy meeting for fiscal 2025 – 26 (FY26) was full of surprises. The Committee frontloaded rate action, by cutting the policy repo rate by 50 basis points (bps) as against the consensus of a 25 bps cut, although this was not unanimous with one member dissenting in favour of a lower cut. 

 

Another surprise was the change in stance, back to ‘neutral’ from ‘accommodative’, after the modification that had been brought in during the last policy itself. Interestingly, akin to the April 2025 meeting, there was no mention of the vote on the stance, suggesting that the same seems to be no longer decided by a vote, as was typically the case in such meetings in the previous years. 

 

Make smarter market moves with The Smart Investor. Daily insights on buzzing stocks and actionable information to guide your investment decisions delivered to your inbox.

Subscribe

 

The third big surprise was the 100-bps reduction in the cash reserve ratio (CRR), which along with the stance change may effectively be signalling the end of this rate cut cycle.

 

Frontloading cuts

 

The decision to frontload rate cuts was largely supported by the lowering of the expected CPI inflation trajectory for the first half of the current fiscal (H1-FY26). The MPC pared its CPI inflation forecasts for Q1 and Q2 FY-26 by as much as 70 bps and 50 bps, respectively, while largely keeping those for H2 FY2026 unchanged vis-à-vis the April 2025 policy. This implies a linear upward trajectory through the fiscal, with the prints projected at 2.9 per cent, 3.4 per cent, 3.9 per cent, and 4.4 per cent from Q1 through Q4 FY2026. 

 

While the prints for the first two quarters are broadly aligned with our expectations, those for the second half of the fiscal could somewhat undershoot the MPC’s projections. We expect the CPI inflation to average at 3.5 per cent in FY26, 20 bps lower than the MPC’s projection of 3.7 per cent for the fiscal. 

 

Notably, the MPC kept the GDP growth projections for FY26 unchanged at 6.5 per cent compared to the April 2025 meeting, which is higher than our forecast of 6.2 per cent for the fiscal. The growth quarterly forecasts were maintained at 6.5 per cent, 6.7 per cent, 6.6 per cent and 6.3 per cent from Q1 through Q4 FY26, above our expectations for these quarters.

 

Policy stance

 

In the April 2025 meeting, the RBI Governor had clarified that the policy stance should be seen as providing guidance on the future direction of the policy rate, without any direct signal on liquidity management. This explains the sudden change in the policy stance within a span of just one meeting. 

 

With inflation expected to rise back to above 4 per cent by Q4-FY26, the Committee has capitalised upon the available headroom to frontload rate action. Besides, it has clearly articulated in the policy statement that after cutting rates by a total of 100 bps, monetary policy is left with very limited space to support growth, given the current outlook on inflation.

 

The unexpected100 bps CRR cut to 3.0 per cent of NDTL in a staggered manner between early-September 2025 and end-November 2025, is expected to pump in durable liquidity to the tune of Rs. 2.5 trillion during the busy season, while aiding in monetary transmission. Having said that, the moves to aid transmission must be supported through a modification in the small savings rates by the Government of India as well.

 

The RBI’s pre-emptive liquidity action would also assist in countering the potential tightness on account of the likely unwinding in its forward book, which remains at quite elevated levels, even though the maturity profile of the same is now elongated relative to that seen six months ago. 

 

In our view, the stance change back to neutral, appears to be a strong signal of a pause, especially when combined with the unexpected CRR cut. As of now, we expect rates to be unchanged in the August 2025 policy review.

 

  (Aditi Nayar is the chief economist and head- research & outreach at ICRA. Views are her own.)