By Soumya Kanti Ghosh

The newly constituted Monetary Policy Committee (MPC) delivered a forward-looking verdict changing the stance to neutral while keeping the policy rates unchanged for the tenth time in a row. It is interesting to note that the change in stance was a unanimous decision. The first meeting of the MPC in all earlier terms also began with unanimous decisions on a rate cut or pause.

A change in stance to neutral comes against a backdrop of the Reserve Bank of India (RBI) steadfastly siding with a 7.2% growth this fiscal and 7.1% in FY26. Interestingly, a simple interpretation of Mint Street’s manifesto discloses the dilemma it faces; preparing to cut rates in the near time even when the growth rate is 7%-plus (or quite elevated in terms of large economies) and the undaunted commitment to the midpoint of inflation target. Add to this the changing dynamics of Indian financial markets where the shifts in saving preferences are re-scripting the tale, altering the conventional sources of liquidity pools, as also associated cost dynamics. However, it is understood that the RBI is giving a long rope to markets to readjust before the ensuing pivot.

RBI projections suggest economic growth is robust and may remain above 7% for the next couple of quarters. The growth may surprise on the upside as the agriculture sector is expected to perform well on the back of above normal rainfall and robust reservoir levels leading to healthy kharif sowing. This raises the question whether the RBI will cut rates when growth is already in a strong momentum. Recent country-wise experiences indicate that with the exception of the Philippines, the GDP growth at the time of rate cut was much lower than the average growth of the preceding four quarters. Thus if a rate cut happens, it will bear testimony to the RBI’s confidence of tackling buoyant growth with manageable inflation. Perhaps 7% growth with a rate cut has never happened in Indian or world history, but for 2016 when the MPC first took over.

Even as the RBI has prepared the market for a 7% growth rate, government projections at 6.5-7% look more reasonable at this point. The credit-deposit differential has narrowed to 150 basis points (bps), the lowest since May 2022, and down from the high of 810 bps in December 2022. Interestingly, the year-to-date growth rate in the current fiscal shows that credit growth, after adjusting for the merger, is still lower by Rs 3 lakh crore (as of September), but more interestingly higher by Rs 3.4 lakh crore compared to deposit. There is also a slowdown in the leading indicators of consumption. Perhaps the months of October and November could script a different story.

The apparent slowdown in deposits has also ensured a crescendo of misplaced narratives with a lower pace of money supply being cited as a strong reason for lower reserve money creation and hence lower deposit growth. However, in an inflation targeting framework money is endogenous, and also the link between money supply and reserve money is agnostic as digitisation has resulted in an increasing money multiplier with much lower currency leakage.

Coming back to the role of monetary policy in enabling better policy transmission, it is observed that while the transmission from a rate change is instantaneous in the money market, it is not so in bank lending. Starting April 2022 the repo rate increased by 250 bps, though the increase in the weighted average lending rate (WALR) on outstanding rupee loan was only 117 bps and for WALR on fresh rupee loan sanctioned was 190 bps. However, in an increasing rate scenario, the retail and micro, small and medium enterprise loan pricing has been impacted immediately, which is not the case for large corporate. The pricing of large corporate depends on many factors including liquidity, rating, pricing power, etc. It is pertinent to mention that 57.5% of the total outstanding floating rate rupee loans are linked to the external benchmark-based lending rate, while 38.6% are linked to the marginal cost of funds-based lending rate. The shift to a neutral stance could further a better pricing deal for corporate loans, enabling faster credit growth.

The RBI has ensured that system liquidity remains comfortable by conducting two-way market operations. After remaining in surplus for roughly the first three fortnights in April, system liquidity turned to deficit till end-June, before turning the corner in July and remaining in surplus mode since then, trudging carefully between absorption through the liquidity adjustment facility and government surplus cash balances. After JP Morgan and Bloomberg, FTSE Russell becomes the third global bond index to include Indian bonds in their Emerging Markets Government Bond Index over a six-month period from September 2025 with incremental inflows expected by about $4.6 billion, providing further support to liquidity.

The other regulatory announcements mirror the RBI’s penchant to reinforce the banking and financial services structural architecture, non-levy of prepayment charges extended to micro/small loans, smoothing data asymmetry for tackling climate funding through proposed two-stage RB-CRIS platform, enhancing UPI Lite wallet limit to Rs 5,000 (while the per-transaction limit in feature phone-centric UPI 123Pay stands enhanced from Rs 5,000 to Rs 10,000), and introducing name look-up facility in inter-bank transfers to mitigate customer woes and reduce frauds. They all go a long way in making banking forward-looking yet connected to the ground.

The RBI’s balancing act is audacious, defying the odds and orbit of the other big boys’ club to take an independent rate cut call. This fine balancing act, assiduously choosing the middle path, gives a raw finesse to Mint Street’s actions in these chequered times. It is uber-stability brought to the broader markets, with a tilt to hygiene and constant adoption of best practices (contrast the virulent opposition to critical Basel III stipulations in financial markets like the US commonly termed as “end game” with that of the RBI under the stewardship of Shaktikanta Das where consultation is the hallmark). Echoing the governor, one can only expect the calibrated bringing back of the inflation horse to the stable, symbolic of the age-old Indian practice of the horse’s return to reinforce the sovereign’s supremacy.

The author is the group chief economic advisor, State Bank of India and member, 16th Finance Commission.

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