Mumbai: The future rate decisions of the central bank’s Monetary Policy Committee could go either way, depending on the inflation outlook and economic growth, said governor Sanjay Malhotra, citing the regulator’s “neutral” policy stance.
Lower inflation and a slowdown in growth can both be equally important catalysts for potential rate cuts, the Reserve Bank of India governor said in an interview with CNBC TV18 on Tuesday.
RBI cut the benchmark repo rate by 25 basis points each in February and April, followed by a 50-bps cut in June, leading to a 100 basis point (or 1 percentage point) drop in rates within five months. Banks borrow from the central bank at the repo rate. Economists at Nomura expect 25 bps cuts in each of the October and December meetings to a terminal rate of 5%.
Retail inflation came in at 2.1% in June, the slowest pace since January 2019 and down from 2.82% in May and 3.16% in April. Inflation measured by the consumer price index (CPI) is projected at 3.7% in FY26, according to the RBI’s June monetary policy statement.
On Tuesday, Malhotra said the RBI’s core mandate is to maintain price stability, and it looks at growth as well. If the inflation outlook remains benign or growth shows signs of slowing, policy rate cuts could be considered, he said. However, such a decision would be based on the outlook rather than Q1 data, according to the RBI governor.
“We won’t weigh inflation above growth,” said Malhotra. “Both are equally important, and the composition of inflation, like base effects and food prices, also matters.”
The economy expanded 6.5% in FY25, the slowest pace in four years, data released at the end of May showed. While announcing the monetary policy decision on 6 June, Malhotra acknowledged that gross domestic product growth remains lower than aspirations, but the central bank retained its forecast at 6.5% for FY26.
Policy stance shift
In June, RBI changed its stance from accommodative to neutral. A neutral stance would mean that the RBI would lean on incoming data to decide which way the rate should swing. The change in stance had surprised many, especially because the six-member Monetary Policy Committee (MPC) changed it to accommodative from neutral only two months ago.
Citing the 100 bps reduction in the policy rate since February, Malhotra had then said that“under the current circumstances, monetary policy is left with very limited space to support growth”.
However, he had added that if growth is weaker, it can mean that rates will go down. “If the growth is good, inflation is going up, it can mean that the repo rate, policy rate can go up. So, it will depend on how the data, both on inflation as well as growth, turns out.”
