The RBI's Fine Balancing Act

Given the global volatility and uncertainty amidst a downturn and a depreciating currency, the MPC has done so by reducing the repo rate but maintaining its stance

- B PRASANNA SAMEER NARANG

In his first monetary policy, the Reserve Bank of India (RBI) governor has emphasized how the flexibility incorporated in the flexible inflation targeting (FIT) regime has worked well for India since its introduction, along with a trade-off between new regulatory measures and cost of regulation, and last but not least providing both durable and overnight liquidity. The Monetary Policy Committee (MPC) reduced the repo rate by 25 basis points (bps) to support growth, as inflation is increasingly aligning with the target, while keeping the stance as neutral.

The RBI reduced its growth forecast for FY26 to 6.7%, lower than the 7.1% in October but the same as the December bulletin. Hence, the MPC has endorsed the growth projection laid out in December given the slowdown in urban consumption. The governor is optimistic about achieving growth in 2025-26 on the back of the reduction in income tax in the Budget, which should incentivize consumption and thus investments along with buoyant rural growth and agriculture production. We believe growth should settle at 6.5% in 2025-26, closer to the MPC's projection.