In its recent policy review, the Reserve Bank of India's Monetary Policy Committee (MPC) provided a 25 basis point repo rate reduction, lowering the benchmark rate to 6%, while emphasizing the importance of timely liquidity interventions and watchful eye on global and domestic risks. The minutes document a sophisticated discussion among MPC members between growth, inflation, and the efficacy of monetary transmission, highlighting a balanced but positive approach as India steers through a global climate that is uncertain.
Repo Rate Reduction and Focus on Liquidity:
The MPC, in a unanimous decision, reduced the policy repo rate by 25 basis points to 6%, attributing this to easing inflation and the necessity of supporting growth. Members emphasized that timely liquidity injections are important to ensure the effective transmission of rate reductions to lending rates and the overall economy.
Aggressive Liquidity Infusion
The RBI announced an ₹80,000 crore liquidity injection through Open Market Operations (OMOs) in April, following a ₹1 lakh crore infusion in March. This aggressive stance aims to shift the banking system from deficit to surplus liquidity, further supporting credit growth and monetary transmission.
Inflation Outlook Mixed, Food Inflation Positive:
Headline inflation moderated, led by a steep drop in food prices and record production of wheat and pulses. The MPC sees CPI inflation at 4.0% for FY26, with food inflation forecast turning "decisively positive." Nevertheless, members warned that global market risks and weather-driven supply disruptions on the downside are still principal upside risks to the inflation path.
Global Uncertainties and Trade Risks:
The MPC identified ongoing global market volatility, trade wars, and tariff wars as possible risks to India's inflation and growth prospects. Members pointed out that merchandise exports may suffer headwinds, while remittances and services exports are good cushions.
Demand for Bolder Interest Rate Cuts and Policy Syncing
A few MPC members proposed a more aggressive strategy, like one 50 basis point rate cut over two moves, in order to have the largest possible effect. There was agreement on the imperative to have coordinated fiscal and monetary measures to support private consumption and investment, particularly considering weak FDI inflows and poor private capex.
External Sector and FY26 Issues:
Although India's external balance is under control, one member cautioned that FY26 would present fresh challenges, particularly if global uncertainties linger and FDI inflows remain lackluster.
Growth Outlook and Policy Stance:
The RBI has forecast real GDP growth at 6.5% in FY26, in a cautiously upbeat tone but keeping an eye open to downside risks from global trends. The policy stance continues to be geared to sustaining growth while keeping inflation expectations within the 4% tolerance band.
Timely actions to provide sufficient liquidity will be prominent in the transmission of rate reductions… The food inflation outlook has turned firmly positive, but global uncertainties and weather shocks may pose upside risks," MPC member Prof. Ram Singh said in the minutes.
Source: PIB, Financial Express, Moneycontrol, The Hindu Business Line, Ventura Securities
