By Kshipra Petkar
After surprising the market with a 50-basis-point rate cut and a 100-bps reduction in the cash reserve ratio, the Monetary Policy Committee (MPC) bowled a googly by reverting to ‘neutral’ from the ‘accommodative’ stance. The change in the stance was supported by all the six members in the MPC.
“After having reduced the policy repo rate by 100 bps in quick succession since February 2025, under the current circumstances, the monetary policy is left with very limited space to support growth. Hence, the MPC also decided to change the stance from accommodative to neutral,” RBI governor Sanjay Malhotra said in his policy statement.
He added that from here onwards, the MPC will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance.
With this change in the stance, economists are divided if this is a pause in the rate-cutting cycle or further rate cuts could be expected in FY26.
Nomura expects downside risks to RBI’s GDP growth and CPI inflation outlooks. “On our forecasts, GDP growth is likely to surprise lower at 6.2% (RBI: 6.5%), while CPI inflation is tracking even lower at 3.3% (RBI has now revised it to 3.7%). Therefore, we do not view today’s action as the end of the easing cycle.” Nomura expects to see the terminal rates at 5.00%, with a likely pause in August, followed by a 25-bps rate cut in each of the October and December reviews.
Barclays, however, said the governor has given a clear forward guidance that the MPC will now be data dependent. The mention that the MPC has “limited space to support growth”, taken with the inflation trajectory, suggests that data dependence implies a status quo at least in the near term.
“The repo rate is now 100 bps lower than at the start of the year, the level that we thought would be terminal in this cycle. This, coupled with the change in stance and the governor’s remarks, indicates a pause in the August 6 policy,” Barclays said.
Given that the early monsoon augurs well for kharif crop and most projections point towards moderation in prices of key commodities including crude oil, the committee decided to reduce the inflation forecast.
“We can now say that we have won the war against inflation,” Malhotra said, as the MPC reduced its inflation forecast by 30 basis points to 3.7% for 2025-26 (Apr-Mar) on Friday.
The inflation forecast for Apr-Jun stood at 2.9%, from 3.6% in the previous policy, July-September at 3.4% from 3.9% and October-December at 3.9% from 3.8%. The inflation projection for the fourth quarter was unchanged at 4.4%. For the next financial year, the policy committee has forecast an inflation target of 4.5%.
However, Malhotra said there is a need to remain watchful on weather-related uncertainties and the evolving tariff-related concerns and their impacts on the global commodity prices. While the outlook on the food inflation outlook remains soft, core inflation is expected to remain benign with easing of international commodity prices, in line with the anticipated global growth slowdown.
On growth, Malhotra said it remains lower than the RBI’s aspirations amid challenging global environments and a heightened uncertainty. The growth forecast for the current fiscal remains unchanged at 6.5%. The central bank aspires that the growth to be at 7-8%. He said it is imperative to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum.
DBS Bank in a report said while the growth momentum is weakening at the margin, the step to front-load easing measures is likely a pre-emptive move to arrest any further slowdown in economic activity.