This refers to an active but calibrated approach to support an economic reform, while gradually focuses on aligning the consumer price index inflation with a compulsory target of 4%. Mpc Forward approach It is commendable, especially given the long gaps of policy transmission.
This rate deduction came on the back of several liquidity-facial measures declared on 27 January, which strengthens the intention of RBI to promote domestic demand.
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While the Central Bank avoided introducing additional liquidity measures on 7 February, it soon announced more liquidity support, enhancing the quantum of open market-conduct and daily variable rate repo (VRR) auction, coupled with an additional 49-day and 45-day VRR auction. 150,000 crore and 3 years of $ 10 billion purchase and selling forex swap.
RBI is expected to announce more open market operations and VRR auctions in the coming months. A large dividend payment for the government required in May, will also inject liquidity in the system.
Governor Sanjay Malhotra assurances that RBI will be cautious in the management of liquidity, which outlines the dual focus of the central bank on macro stability and development. The decision to keep the Cash Reserve Ratio (CRR) stable at 4%was prudent as a buffer in the case of a economic shock after a 50-BPS deduction in the December. This approach allows RBI to maintain flexibility.
Given further, RBI is expected to cut another 25-BPS rate in its April policy review, bringing the repo rate down to 6.0%. This is likely to be with a change in its monetary policy attitude from ‘neutral’ to ‘adjustment’, indicating a deep commitment to development support. The time of change of this stance will be strategic. Waiting until April, the RBI can align its liquidity stance more closely with its rate of stance, ensuring stability in its structure.
The April 1st attitude change can indicate the will power to improve either a dark and long-term cutting cycle or liquidity, so that short-term rates remain between repo and permanent deposit facility rates, with acting in the form of roof instead of floors.
We lend more towards the second possibility, hopeful that the RBI provided effective ease of 25bps through the liquidity route after cutting the 50bps rate through February and April. Then effective ease will be the amount of 75bps.
Given the global economic background and domestic development-immunity, there is unlikely to cut the repo rate further from 50bps in this cycle. The US Federal Reserve has cut a rate of only 100bps in 2024 and there is no more deduction in 2025, RBI will be vigilant. The GDP growth estimates of 6.7% for 2025-26, combined with a inflation launch of 4.2%, suggests that the 50bps repo rate cut and effective ease of 75bps will be sufficient in this cycle.
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Excessive rate cuts can unstable this balance, possibly easily requiring a sharp reversal of measures, which will be upside down. A front-loaded rate-cutting strategy reduces the need for deeper cuts in the cycle. This approach combined with fiscal support Tax cuts and continuous capital expenditure are expected to narrow a negative output gap without stoking 1 trillion, demand-side inflation.
Coordinated efforts of fiscal and monetary policies have been designed to maintain non-influential actual GDP growth in a range of 6.5–7.0% in 2025–26.
Governor Malhotra’s RBI leadership is likely to see more two-way movements showing the market dynamics in a trajectory of the rupee. While we estimate the end of $ 88 to end by December 2025, close-term instability cannot be ruled out, especially if global trade stress increases. RBI is likely to keep its monetary and foreign exchange policies separated, which can help ensure that exchange rate management does not reduce domestic policy goals.
Gradually and marginal depreciation depreciation is not necessary. This can promote export and development on margins, without significantly enhancing India’s imported inflation risks. The 4.2% inflation projection of the RBI for 2025–26 appears realistic and closely align with a private forecast of 4.3%. Even with an effective ease of 75bps, the actual rates are expected to be positive to 1.5%, providing adequate room for the RBI to support the development without compromising the price stability.
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While the RBI growth forecast for 2025–26 is slightly above 6.5% for 6.7%, it is 7% or more than the possible growth rate of the economy. This outlines the need for coordinated fiscal and monetary support to bridge the output gap. Despite the instability inherent in quarterly GDP data, the broad story is unchanged: the economy requires some policy support to achieve its full potential.
The RBI’s February policy marked a successful beginning for Governor Malhotra’s tenure, creating a delicate balance between development and value stability. By providing an optimal dose of monetary ease, the central bank has strengthened its commitment to promote a flexible and dynamic economy. Coupled with the government’s development-oriented fiscal policy, this approach determines the stage for a strong economic reform in the front quarters, ensuring that India lives on the path of durable and inclusive development.
The author is at the Chief Economist, India, Malaysia and South Asia Deuts Bank AG.