Decision to hold rates appropriate and prudent, MPC unanimity a surprise

The decision of the central bank’s Monetary Policy Committee (MPC) to keep rates unchanged was unsurprising for many because it was a close call. However, the rates market was disappointed on two counts. First, it was the unanimity of the decision. A vote split was expected, with the anticipation that a few external members would be in favour of a cut owing to a subdued inflation trajectory. But all six members voted to keep the rates on hold and maintain a “neutral” stance. And second, there was robust commentary on the growth outlook, despite mixed growth signals, and a relatively high tariff announcement by the US. The markets were expecting some direct/indirect reflection on the increased risks associated with the recent tariff announcement.

 

However, the policy statement and tone were appropriate and prudent for the following reasons.

 

Let’s hypothesise a situation where downside risks to growth in gross domestic product (GDP) were flagged more explicitly on the higher tariff announcement. Such a scenario could have been interpreted as an affirmation from Indian policymakers of prolonged tariff uncertainty. Such signals are unwarranted, given that details are scanty and negotiations with the US are on.

 

The RBI governor’s post-policy conference also stated that uncertainty on tariff negotiations made any quantification on the growth impact difficult at this juncture. Thus, a rushed decision without enough information would not have reflected well on rate setters. The release of Q1FY26 GDP growth data this month and possibly more clarity on the tariff situation by the next meeting would provide the MPC more time to review the growth outlook more comprehensively.

 

However, the unanimity on the decision was a surprise. But it is likely that policymakers decided to stay away from dissent in an environment where sources of uncertainty remain manifold. Equally important, as the MPC had already front-loaded its monetary-policy easing (100 basis points of repo-rate cuts in five months plus a yet-to-kick-in cash reserve ratio cut of 100 basis points from September), the urgency to ease was likely limited. Only half the repo rate cuts have been passed through as of end-June. Lastly, food inflation -- the main driver of low consumer-price inflation -- is expected to remain below 3 per cent until end-December 2025. With the governor highlighting that volatility in food inflation is three times that of core inflation, MPC members will likely read low prints in the near term more cautiously, especially with consumer-price inflation rate expected to move above 4.5 per cent over the next 12 months.

 

With the MPC having reiterated its data-dependency, we think it will be quick to ease rates further if needed. If tariff tensions continue and an improvement in first-half growth diverges from expectations, we think the space for easing could emerge. Similarly, if the FY27 consumer-price inflation rate stays close to 4 per cent, rate cuts could be considered. However, such clarity must emerge first. For now, we expect a status quo for the rest of FY26 but closely watch trade developments and economic data.