It is time to take a pause, probably

AFTER SURPRISING THE market with a 50-basis-point rate cut and a 100-bps reduction in the cash reserve ratio, the Monetary Policy Committee (MPC) bowled a googly by reverting to 'neutral' from the 'accommodative' stance.

- RAGHAVENDRA KAMATH, VIVEAT PINTO & SWARAJ BAGGONKAR

The change in the stance was supported by all the six members in the MPC.

"After having reduced the policy repo rate by 100 bps in quick succession since February 2025, under the current circumstances, the monetary policy is left with very limited space to support growth. Hence, the MPC also decided to change the stance from accommodative to neutral," RBI governor Sanjay Malhotra said in his policy statement.

He added that from here onwards, the MPC will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance.

With this change in the stance, economists are divided if this is a pause in the rate-cutting cycle or further rate cuts could be expected in FY26.

Nomura expects downside risks to RBI's GDP growth and CPI inflation outlooks. "On our forecasts, GDP growth is likely to surprise lower at 6.2% (RBI: 6.5%), while CPI inflation is tracking even lower at 3.3% (RBI has now revised it to 3.7%). Therefore, we do not view today's action as the end of the easing cycle."

Nomura expects to see the terminal rates at 5.00%, with a likely pause in August, followed by a 25-bps rate cut in each of the October and December reviews.