The Reserve Bank's leap of faith: A jumbo rate cut is hard to justify

It has gone all out to spur growth but only posterity will tell if a loose monetary policy will work without triggering inflation

- MYTHILI BHUSNURMATH

It's a study in contrasts. About a month to the day, the US Federal Reserve left interest rates unchanged in a wait-and-watch response to the uncertainty about how President Donald Trump's tariffs will raise inflation and/or slow growth, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) saw no merit in waiting for the fog to lift. It cut rates for the third time in a row and by a larger-than-expected 50 basis points to 5.5%. Not content with that, it went in for what many might term an 'overkill,' lowering the cash reserve ratio (CRR), or the amount of bank deposits impounded with RBI, by 100 basis points, which will over the course of this year release an additional ₹2.5 trillion of liquidity into a system already flush with funds.

RBI's leap of faith in support of growth, when many would argue that growth is doing quite well by its own projections, is hard to justify. At a time when it is impossible to know for sure whether the price or growth effects of US tariffs will dominate, front-loading action could well be a two-edged sword. The belief (mistaken?) that lower interest rates and surplus liquidity alone will raise growth without reigniting inflation beats logic. And past experience too.

So, what has changed since the last meeting in April 2025 that could possibly justify the sea-change to a looser-than-expected (warranted?) monetary policy?