MPC's June meeting: In pursuit of growth
The June meeting of the RBI's Monetary Policy Committee contained many surprises. As against expectations of a 25 basis point cut in interest rates, the committee lowered the benchmark repo rate by 50 basis points. This brings the cumulative cuts since February to 100 basis points. The repo rate now stands at 5.5 per cent. The rationale for doing so seems straightforward. As RBI Governor Sanjay Malhotra said, 'It is imperative to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum.' And muted inflation provides the central bank the space to lower interest rates to do so.
Inflation had edged lower to 3.16 per cent in April and is likely to stay subdued. A favourable monsoon bodes well for farm output and there are expectations of major commodities such as crude oil witnessing moderation. Forecasts by the RBI and most analysts do indicate softness in prices. As per the central bank's latest forecast, retail inflation, as measured by the consumer price index, is expected to average 3.7 per cent in 2025-26 (3.15 per cent in the first half of the year and 4.15 per cent in the second half). This is lower than its earlier estimate of 4 per cent. Alongside the rate cut, the RBI has also unexpectedly cut the cash reserve ratio by 100 basis points to boost liquidity. As per the central bank, this measure could release primary liquidity of Rs 2.5 lakh crore by December 2025. This will aid in policy transmission.
However, at the same meeting, the RBI also unexpectedly announced a change in its policy stance from 'accommodative' to 'neutral', after having shifted it only in the last meeting. In the April policy meeting, the RBI Governor had said that the 'stance of monetary policy signals the intended direction of policy rates going forward'. This sudden decision is being viewed by some as signalling a pause in the rate cut cycle. In his comments, Malhotra did say that 'monetary policy is left with very limited space to support growth'. And though the central bank has retained its estimate of GDP growth for 2025-26 at 6.5 per cent, there does remain considerable uncertainty over the growth momentum. In fact, it has noted that 'spillovers emanating from protracted geopolitical tensions, and global trade and weather-related uncertainties, pose downside risks to growth'. Thus, taken together, the various announcements in the June meeting do suggest that the central bank will probably adopt a wait-and-watch approach over the coming months as it assesses the impact of the measures it has announced so far. Policy action in this period will depend on how the trajectory of growth and inflation evolves.
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