Stable environment: Base-year revisions may not have immediate implications

The RBI's MPC held rates steady, citing improved growth and benign inflation, while announcing regulatory steps to boost credit flow and strengthen digital payment safety

The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) — as widely expected by market participants —decided on Friday to keep the policy repo rate unchanged in its last meeting this financial year. There were a number of reasons for the committee to maintain the status quo. The growth outlook, for instance, has improved. According to the first advance estimates of the National Statistics Office, the Indian economy is expected to grow by 7.4 per cent this financial year. The MPC has revised its growth projections upwards for the first and second quarters of 2026-27 to 6.9 per cent and 7 per cent, respectively. Inflation projections for the first two quarters next financial year were also revised to 4 per cent and 4.2 per cent, respectively, compared to the previous forecast of 3.9 per cent and 4 per cent. 

The RBI rightly refrained from giving full-year projections because of the impending base-year revision of the series for gross domestic product (GDP) and the consumer price index (CPI) in the coming days. Although the revisions will not affect underlying economic activities, changes in the composition of the CPI and GDP series could have implications for future projections. In the context of the CPI, for example, the weighting of food items is expected to come down significantly. This should help make it more stable and predictable. Although it will be worth watching how the composition of the index shifts and how the MPC interprets it in its next meeting, the immediate policy implications may not be significant. The underlying inflation or the core inflation rate remains benign and, to an extent, is being driven by the runup in precious metals. In terms of growth, the recent trade deal with the European Union, the reduction in tariffs by the United States, and the sustained government push for capital expenditure have improved the outlook.  However, there are concerns in the market regarding the large borrowing programme of the government. The yield on the 10-year government bonds increased 9 basis points on the policy day. Some market participants were expecting announcements related to open- market operations. However, during the post-policy media interaction, the RBI’s top management said the borrowing programme would be conducted smoothly and that adequate liquidity would be provided. In fact, liquidity conditions at the moment are comfortable. 

Besides the MPC’s decision, the RBI also announced several regulatory measures worth highlighting. Notably, the regulator has proposed a framework to compensate banking customers for up to ₹25,000 losses incurred in small-value fraudulent transactions. The regulator will come up with a discussion paper on measures to enhance the safety of digital payments. As more customers adopt digital payments, the safety mechanism will need to evolve continuously. A mechanism to compensate for losses in fraudulent transactions must be welcomed in this regard. Further, the RBI will be reviewing the lead-bank scheme, the business-correspondent model, and the Kisan Credit-Card scheme.  A review should help improve the functioning of these schemes. To improve credit flow, the limit for collateral-free lending to small and medium enterprises has been proposed to be increased from ₹10 lakh to ₹20 lakh. Relaxation in norms for non-banking financial companies up to a certain size was also announced, which should help improve business conditions.