Monetary Policy Needs To Remain Watchful, Neutral Stance To Provide Flexibility In Uncertainty: RBI Governor
Uncertainty in external demand remains the major drag on growth as it also hinders private investment intentions, which is yet to show visible signs of improvement, says Sanjay Malhotra.
Monetary policy needs to remain watchful, especially considering the current state of uncertainty on the external front, RBI Governor Sanjay Malhotra has said.
The monetary policy committee decided to unanimously keep the repo rate unchanged at 5.5%, when it met earlier this month. The MPC also decided to keep the stance neutral.
The neutral stance will provide monetary policy the necessary flexibility to respond to the evolving domestic and global economic conditions, according to the minutes of the MPC meeting that was published on Wednesday.
"GDP growth is certainly lower than what we can achieve," he said, adding that high-frequency indicators do point towards buoyant rural economic activity and consumption. Urban spending continues to remain sluggish and is likely to pick up during the festive season, especially in a period of benign inflation.
Uncertainty in external demand, driven by tariff and geopolitical uncertainty, remains the major drag on growth as it also hinders private investment intentions, which is yet to show visible signs of improvement, he said.
"Although we are likely to see inflation undershooting the target in the near term, with a likelihood of monthly numbers even crossing the lower tolerance band of 2%, headline inflation is projected to inch up from Q3 onwards," Malhotra said. Monetary policy transmission of the cumulative 100-basis-point cut in the policy rate since February 2025, though hastened due to various measures, is still continuing, he added.
"Taking into account the growth-inflation outlook, past actions, the state of the domestic economy, and the global dynamics, I do not see the scope or rationale for a further policy rate cut at this point," Poonam Gupta, deputy governor at the central bank, said, adding that future actions could be data dependent.
Key Commentary
Executive Director Rajiv Ranjan called the last MPC meet "one of the most difficult meetings in terms of deciding on the future course of monetary policy", adding that arguments were equally strong and delicately poised on both sides in this August meeting — to cut the policy repo rate by 25 bps or not to cut.
External member Ram Singh said that under normal circumstances, there would be a case for a growth-supportive interest rate cut, given the benign inflation prospects. However, the unusually high degree of uncertainty on both inflation and growth fronts calls for greater caution.
The tariff tussle between the two largest economies will simultaneously unleash inflationary and deflationary pressures on the Indian economy, Singh said. "To respond to an unpredictable set of events, it is crucial to maintain policy options, in terms of the number of policy tools that can be used as well as their force," he added.
