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Reserve Bank of India (RBI) Governor Sanjay Malhotra’s statement that price stability is a necessary but not a sufficient condition to ensure growth is a justification for the apex bank’s Monetary Policy Committee’s (MPC) decision to slash the policy rate and the Cash Reserve Ratio (CRR). While the expectation was a rate cut of 25 basis points, the MPC went in for a 50 point cut at its meeting on Friday. On the back of two earlier reductions in February and April, this brings the cumulative cuts this year to 100 basis points. That clearly shows that the RBI’s attention has now shifted to growth. The CRR has been cut by 100 points. The new focus is evident again from Malhotra’s words: “It is imperative to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum.”
The muted trend in inflation provided the confidence for the RBI to lower the interest rates. It is also clear that the rate cut was an indication of its lack of confidence in the ability of the economy to sustain the 7.4% growth in the March quarter without more policy support. Inflation had declined to 3.16% in April and is likely to stay subdued. The RBI expects it to average 3.7% in 2025-26, lower than its earlier estimate of 4%. The RBI has projected growth in the current financial year at 6.5%. The country needs a strong push for faster growth, and the RBI is using monetary policy as a tool for it. In the present circumstances, there is little room left for fiscal boosts. The government is not in a position to increase capital expenditure significantly. While the rate cut will make cheaper credit available to corporates and individuals, the CRR cut will enable better transmission as banks will have to keep less funds with themselves.
It will have to be seen whether the decisions will raise private consumption and put in motion the private capex cycle. Apart from policy support, the outlook is favourable with a likely good monsoon. Malhotra has underlined good performance by corporates, banks, households, government and the external sector, besides stability on financial, price and political fronts. He has also talked of opportunities in terms of demography, digitisation and domestic demand as favourable factors. But the RBI has also shifted its stance from accommodative to neutral, which shows that there may not be any more rate cuts in the near term. That is probably because of the uncertainties on the global and domestic fronts, which cannot be ignored.