NEW DELHI: The Monetary policy committee’s decision to shift the monetary policy stance from ‘Accommodative’ to ‘Neutral’ has surprised the analysts more than the 50-bps repo rate cut against an expectation of a 25-bps cut.
The decision not only means a pause in the rate cut, it could actually mean a hike in rate if macroeconomic situations change. Speaking to the media after announcing the MPC decisions, RBI governor Sanjay Malhotra said that neutral (stance) will mean that it can go either way.
“It will depend on how the data comes in. If the growth is weaker, it can mean that it will go down. If the growth is good, inflation is going up, the repo rate can go up,” clarified the governor.
During a media briefing, the RBI Governor clarified the central bank's shift from an accommodative to a neutral monetary policy stance. He explained that this change indicates a "very limited space" for further monetary policy action given the current economic circumstances of approximately 6.5% growth and a projected inflation of 3.7% for the current year, rising to around 4.5% next year. The governor emphasized that the neutral stance allows for future rate adjustments in either direction—up or down—depending on incoming inflation and growth data.
All six Monetary Policy Committee (MPC) members agreed on this shift to neutral.
Announcing the decisions of the Monetary Policy Committee (MPC), RBI Governor Sanjay Malhotra said, “Monetary policy is now left with very limited space to support growth. Hence, the MPC also decided to change the stance from accommodative to neutral.”
The policy shift accompanies a 50 basis points cut in the repo rate, bringing it down to 5.5%, as inflation remains well below the central bank’s 4% target. The central bank also slashed the Cash Reserve Ratio (CRR) by 100 basis points, in a staggered manner, to infuse durable liquidity.
While acknowledging the benign inflation environment, Malhotra cautioned that the growth-inflation trade-off is becoming more complex, given global uncertainties and capital flow volatility. “The last mile of disinflation is turning out to be more protracted,” he said.
RBI now projects CPI inflation for FY26 at 3.7%, down from 4% earlier, and has maintained the GDP growth forecast at 6.5%.