Policy space to open up if inflation is below projections

While cutting the key policy repo rate by 50 basis points (bps) and changing its policy stance to neutral from accommodative in its June review, the Reserve Bank of India said that monetary policy is left with limited space to support growth.

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Sanjay Malhotra, Governor, Reserve Bank of India, explains the rationale behind the large rate cut and the change in stance while clarifying the role of the cash reserve ratio in an exclusive interview with Manojit Saha in Mumbai. He reiterated that the RBI will continue to watch the incoming data on inflation and growth, and take a call. Edited excerpts:

CPI inflation for May, at 2.82 per cent, was below expectations. Does that open up some more space for easing? Which will give you more comfort for further policy easing – lower than expected inflation or lower than expected growth? In hindsight, do you think the stance change to neutral signaled a more hawkish tone to the market than you had expected?

The MPC was of the view that the current macroeconomic conditions and the outlook warranted a neutral stance after bringing the repo rate down to 5.5 per cent. It is pertinent to highlight that it is not only the current macroeconomic conditions including current inflation that matter but more importantly, the outlook for these. While the CPI headline inflation for April 2025 was 3.2 per cent, the projection of CPI headline for 2025-26 is 3.7 per cent and that for Q4 is 4.4 per cent. It was explained in the April monetary policy statement that a neutral rate is associated with a state of the economy which neither calls for stimulating economic activity nor calls for controlling inflation by curtailing demand and provides flexibility to move in either direction on the basis of evolving economic conditions.

The 2.8 per cent inflation is in line with our expectations. In fact, for Q1 of 2025-26, our projection given in the MPC resolution is 2.9 per cent. The average inflation for April-May works out to 3.0 per cent. So, policy decisions were taken by the MPC in its June meeting keeping these numbers in mind.