By Dipti DeshpandeAfter a five-month pause, the Monetary Policy Committee (MPC) of the
Reserve Bank of India reduced the repo rate again.
This action was complemented by additional liquidity-easing measures aimed at speeding up transmission to the real economy at a time when growth expectations are slowing amid elevated US tariffs.
The policy stance was kept at neutral, but the sharp decline in inflation forecasts hints at a dovish outlook.
Another 25 basis points, akin to the June cut, now brings the repo to 5.25%.
But the effect on market interest rates is likely to be amplified by the nearly Rs 1.5 lakh crore of liquidity infusion through open market purchases of government securities (Gsecs) and the dollar-rupee buy/swap arrangement in December.
These measures are expected to soften both short term interest rates as well as the 10-year G-sec yields.
Overall, the developments highlight the growth-supportive nature of this policy decision.
On the surface, the Indian economy appears to have weathered the impact of the US tariff actions and heightened global geopolitical uncertainty with remarkable resilience—a six-quarter high gross domestic product (GDP) growth of 8.2%, taking growth in the first half of fiscal 2026 to 8%.
Private consumption growth outperformed the preceding three quarters, nearly touching the 8% mark, while investment growth, despite a mild slowdown, remained robust at 7.3%.
Exports were somewhat subdued, but the services segment held up, and merchandise exporters enjoyed some benefit of export frontrunning and geographical diversification.
Yet, these strong growth numbers should be viewed with nuance. A low inflation deflator and favourable base effects—both of which should start fading in the second half of the fiscal—amplified the headline GDP figures. Some moderation in investment is also likely as the government, a major driver of capital expenditure (capex), fine-tunes spending to meet fiscal goals amid revenue pressures. Consumption should hold up in the second half as greater benefits from the goods and services tax (GST) rate cuts are reaped, but overall growth could begin easing given the high base.
It is also worth noting that as the country moves closer to the adoption of a new base year for national accounting (from 2011-12 to 2022-23), early estimates might paint a less accurate picture of the underlying momentum.
What were the cues for monetary policy?
Monetary policy rightly took a step back from the overwhelmingly positive noise to focus on the signals. After all, monetary policy actions influence the economy with a lag.
What, then, are these signals?
First up, the strong growth momentum of the economy will moderate next fiscal as the base effect tempers the numbers. Crisil estimates GDP growth in fiscal 2026 at 7%, moderating to 6.7% in fiscal 2027. Consumption growth should hold up as macro tailwinds extend into the next year. Rising capacity utilisation should propel an improvement in private corporate capex next fiscal and partly offset any moderation in government capex while exports could be a pressure point
A rate cut at the current juncture should help sustain the growth momentum longer as lower policy rates ease borrowing costs and support credit expansion.
For corporates, in addition to lower bank lending rates, an easier monetary policy can help keep bond yields in check. Currently, the repo rate and the benchmark 10-year government security yield are at a deviance, with the latter showing limited easing. A reduction in policy rates could narrow this gap and ease pressures in the bond market.
A low inflation environment, characterised by low core inflation, primarily provided policy space. While most of the credit for bringing down the headline consumer price index-based inflation goes to food prices, core inflation has contributed significantly to the disinflation trend.
Excluding the impact of surging gold prices, core inflation—a measure closer to identifying demand-side price pressures in the economy—has fallen from a peak of 3.4% in April to 2.6% in October. GST rate cuts should keep it subdued for the rest of the fiscal.
Next fiscal, inflation may edge up because of the base effect (to nearly 5%) but can be reasoned out by sifting the base effect impact. In a global environment of soft oil and commodity prices, inflationary pressures overall can be assumed to be manageable, barring weather-related shocks.
Against this backdrop, delaying a rate cut could have meant missing an optimal window as growth and inflation trajectories shift.
Finally, financial market signals matter.
Crisil’s Financial Conditions Index, though still in the comfort zone, has seen some tightening this year owing to lower foreign portfolio inflows.
However, domestic indicators remain encouraging. Lower interest rates have encouraged credit offtake. Bank credit growth is gradually picking up, pointing to an improving demand environment. Consumer confidence has risen, especially in rural areas, though urban confidence remains slightly below the healthy threshold.
Meanwhile, capacity utilisation in the manufacturing sector is above 75%, but firms are looking for clarity on global conditions and the durability of domestic demand.
Therefore, in today’s uncertain global environment and with domestic inflation under control, sustainability of growth should be at the top of the agenda. The coordinated fiscal and monetary policy support to growth should remain in focus with a keen eye on the fiscal maths and inflation signals.
The MPC has rightly overlooked the high GDP growth and exceptionally low inflation numbers of the first half of the fiscal to focus on the trajectory ahead and the need to sustain the growth recovery.
(The author is Principal Economist, Crisil Limited. Views are personal.)
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