Rate Cut Still on the Table, Says RBI Guv Amid Neutral Policy Stance

Mumbai: RBI governor Sanjay Malhotra said further interest rate cuts have not been ruled out, with the monetary policy committee in a neutral phase that allows room to move “up, down or pause.” He said future rate decisions will be “data driven more on the outlook,” particularly for inflation and growth.

“The neutral stance gives MPC the flexibility to move in either direction or pause. The MPC is looking at incoming data. Inflation has come down to about 2.1%, but monetary policy is forward looking, guided more by the outlook 6 to 12 months ahead. These are difficult decisions. Earlier projections had Q4 at 4.4%, though actual numbers for Q1 came in lower, so Q4 may be revised downward. Policy, being data driven and based on the outlook, will be guided by revised numbers, if any, and take a call," said Malhotra while speaking at a fireside chat at an event in Mumbai.

The central bank had last cut the repo rate by 50 basis points on Jun 6 to 5.5% and shifted to a neutral stance. Since then, it has continued to support the economy through liquidity infusions and measures aimed at stimulating credit and activity in the face of softening inflation and slowing growth.

In 2025, the RBI delivered three repo rate cuts: 25 basis points each in Feb and Apr, followed by a deeper 50 basis point cut in Jun. These moves were meant to tackle weak credit demand and consumption while supporting recovery as inflation eased.

Alongside the Jun rate cut, the RBI announced a phased 1% cut in the cash reserve ratio, reducing it from 4% to 3%. This is intended to inject more liquidity into the banking system and support credit growth.

Public sector banks responded faster than private peers, cutting average lending rates on fresh rupee loans by 31 basis points by May, compared to a 20 basis point cut by private banks. This shows uneven transmission of monetary policy across the banking sector.

Surplus liquidity has brought down deposit costs and is expected to compress net interest margins, but the RBI expects this to stimulate further lending and investment.

Despite these policy steps, data through Jul shows economic momentum remains uneven. Real GDP is projected to grow 6.5% in FY26, but several high-frequency indicators such as GST collections, exports, and consumption have slowed to single-digit growth. Bank credit growth dropped to 9% in Jun from 16% a year ago.

Consumer price inflation has moderated and remained within the 2–6% band, often hovering near the medium-term target of 4%. This price stability has allowed the RBI to continue with a growth-supportive stance.

While stress in retail credit appears to be easing, the RBI flagged emerging risks in microfinance. It said regulatory monitoring will continue as banks and NBFCs recalibrate lending and collection practices.

Malhotra and other MPC members have maintained that the committee's neutral stance offers flexibility to respond as needed. The central bank’s outlook focuses on data over the next 6–12 months, especially the path of inflation and growth, rather than reacting to short-term fluctuations.