Rate cut signals RBI's pivot to growth as inflation slows

It does not happen very often that a central bank goes into its monetary policy meeting having overachieved on both its targets.

- SHAILENDRA JHINGAN

With gross domestic product (GDP) growth averaging 8% (above the 7% potential level) and inflation based on consumer price index (CPI) averaging 2.2% (below the target of 4%) in 1HFY26, the Reserve Bank of India (RBI) had ample policy room to meet its dual mandate in 1HFY26. But given the primacy of inflation in its mandate, the RBI did well to reduce the repo rate by 25 basis points (bps) to 5.25%. The central bank also took steps to support monetary policy transmission by announcing open market operations of ₹1 trillion, dollar buy-sell swaps ($5 billion) and promised to provide adequate liquidity going forward.

The repo rate reduction will likely boost growth, just when it's feared to soften in 2HFY26 due to US tariff-related headwinds and an expected slowdown in government spending. The monetary policy support via rate cuts and easy liquidity complements the measures already taken by the government in the form of goods and services tax (GST) cuts. The depreciation of the rupee also adds to this reflationary impetus and all policy levers are now fully geared towards supporting growth.