The RBI, finally uncaged the interest rate tool to take down the consumption slowdown monster.
On Friday, Governor Sanjay Malhotra in his very first monetary policy review leaped to the finish line to announce a 25% bps repo rate cut -- the first such reduction in about five years. The last time rates were cut was in May, 2020.
The benchmark repo rate, or the overnight lending rate, stands at 6.25%, down from 6.5%, while the marginal standing facility and the bank rate are held at 6.5% each. The MPC unanimously decided to retain the neutral stance, while unambiguously focused on durable alignment of inflation, while supporting growth.
With rate cuts reporting for duty, and given the personal income tax cuts announced last week, household consumption is all set to get a double-barreled boost. But for now, the first rate cut in five years didn't offer immediate cheer and happy thoughts, with markets remaining grumpy.
Sensex and Nifty shed about 180 points and 100 points respectively, soon after Malhotra's morning statement.
Markets were expecting the Monetary Policy Committee (MPC) to shift to an accommodative policy stance, which would have officially announced the rate easing cycle involving a series of rate cuts.
But citing excess volatility in global financial markets and continued global trade uncertainties, Malhotra and his team remain watchful and stuck to neutral stance that allows them the flexibility to respond to evolving macro conditions. In other words, rate hikes aren't entirely off the table and should situations worsen, Malhotra may jack up policy rates as well.
Economists widely anticipated the central bank to launch the rate cutting cycle with some even expecting the central bank to takeoff with a jumbo 50 bps cut, followed by another 50-75 bps policy rate cuts over the coming quarters. But the rate cut delight came with existential doubts over growth with Malhotra dutifully reminding us that the world is to its neck with troubles and there's no shortage of things to worry about.
While he didn't declare a victory over inflation, he, however, expressed hope that prices will remain range-bound next fiscal.
The central bank retained its inflation forecast for the current fiscal at 4.8%, with Q4 estimate slightly lowered to 4.4% from 4.5%. For FY26, headline inflation is pegged at 4.2%, with Q1 at 4.5%, Q2 at 4%, Q3 at 3.8% and Q4 at 4.2%.
Malhotra expressed hope that food inflation should see significant softening, thanks to better kharif output and a favourable monsoon.
As for growth, considering the looming global uncertainties and softer expansion of real GDP at 6.4% during the current fiscal, the RBI anticipates FY26 growth to remain moderate at 6.7%, which is in line with the estimates provided by the Economic Survey. Growth in Q1 is projected at 6.7%, lower than the central bank's December estimate of 6.9%, while Q2 estimate too is lowered to 7% from 7.3% projected earlier. As for Q3 and Q4, real GDP growth is pegged at 6.5% each.
Going forward, Malhotra expects economic activity to improve with agricultural output remaining upbeat, while manufacturing is expected to recover in the second half of 2025. While preliminary corporate results indicate mild recovery manufacturing, mining is likely to rebound. Though services sector activity appears resilient, the PMI services declined from its recent peak.
On the demand side, rural demand is upbeat, while urban demand remains subdued with high-frequency indicators giving mixed signals. That said, the recent income tax relief along with moderating inflation, healthy agricultural output will likely drive household consumption. Government spending may remain modest, and given the higher capacity utilization and robust business expansion along with continued government policy support should augur well for investments.
On the domestic front, liquidity pressures in the banking sector persist, with slower deposit growth and tightening financial conditions. Malhotra assured that the central bank will continue to monitor the evolving liquidity and financial market conditions and proactively take measures to ensure orderly liquidity conditions.
Stating that banks were reluctant to lend in the uncollateratised call money market, and instead were passively parking funds with the RBI, he urged them to actively trade among themselves in the uncollateratised call money market.
