Sanjay Malhotra's maiden monetary policy speech delivered a much anticipated 25 basis point rate cut. The first rate reduction since May 2020, when the Covid-19 pandemic was still wreaking havoc. That's nearly five years in the making.
Repo rate is now down to 6.25%, the lowest it has been since February 2023, when RBI had announced a pause in rate action. By that time, the central bank had consistently hiked interest rates by 250 bps to 6.5% since May 2022.
More important than the rate action was the commentary Malhotra provided toward the end of the speech. According to the RBI Governor, the monetary policy committee “felt that a restrictive monetary policy is more appropriate at the current juncture".
Though, the Governor was quick to add that future decisions will depend on a fresh assessment of macroeconomic conditions.
But the very fact that “less restrictive monetary policy” made its debut in the monetary policy speech is a sign of relief. Yes, the MPC's stance is still ‘neutral', but the rate setting panel will likely look at the macros with a lenient lens.
Growth forecast by the RBI has been revised lower, even though the central bank is confident of a growth uptick in fiscal 2026. Food inflation, too, is expected to inch lower, if no supply side issues play spoilsport. While domestic issues seem to be abating in the RBI's view, global uncertainties are still a sore point, which will be watched closely.
The equity market did see some negative reactions initially, as the crucial “rate cut is fine, but what else?” question was not answered. Liquidity easing measures, which the markets would have loved, did not make an appearance. Instead, the regulator said that banks need to actively participate in the call money markets, to efficiently distribute liquidity among the ‘haves' and ‘have nots'.
This was a dovish monetary policy by all accounts. Now, one waits for the April announcements, when the first policy of FY26 will set the tone for the whole year.
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