RBI rate actions are signals that markets need not always heed

Contrary to widespread belief, monetary transmission is both slower and far-from-linear, globally

- MYTHILI BHUSNURMATH

Caught between the devil and the deep sea—read, between cutting rates too much, too fast, potentially leading to higher inflation, and continuing with a cautious policy that could potentially harm growth—the Reserve Bank of India's (RBI) rate-setting Monetary Policy Committee (MPC) responded as many saner voices had predicted: By opting to stay put till the mist clears.

So, as at the last MPC meet in August 2025, the policy repo rate, or the rate at which RBI pumps liquidity into the system, was kept unchanged at 5.5% while the monetary policy stance was retained at neutral.

This is not surprising. Speaking to a television channel about the MPC's decision to maintain the status quo in August 2025, one of its members compared the committee's predicament to that of a man sitting in a dark room, knowing there is a huge oil spill somewhere nearby; but not knowing where. In such a situation, he pointed out, rightly, that he is best off if he stays put and waits for some light to enter the room so that he doesn't slip and fall.

The MPC seems to have done just that at its last meeting. Yet, in a world increasingly shaped by binaries—black and white, right and left—rather than different shades of grey, opinion on monetary policy was sharply divided in the run-up to the October meet of the MPC. Between those who saw rate action—a cut—as the only way forward and those who saw 'no action,' not to be confused with 'inaction,' as an equally plausible option.