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RBI MPC minutes: Focusing on transmission

The MPC expressed the need to boost growth while inflation remained tepid and hence opted for frontloading of rate cuts to quicken the policy transmission. Given the shift in stance to neutral, we expect the RBI to be on pause for now, with the possibility of some easing in the latter part of FY2026, depending on the growth-inflation mix.

RBI will pause in the near term; some space remains to be accommodative

The RBI MPC minutes, besides indicating the push for growth, also leaned on the need for quick transmission. The reaction of bond markets to the triple surprise policy has been in contrast to the intended impact, given that hopes of further easing have dimmed considerably. We expect the transmission to lending/deposit rates to play out over a couple of quarters. While it is unlikely that the RBI will act in the next 1-2 policies, we continue to see space for some easing, given our FY2026 inflation estimate of 3.5% (RBI: 3.7%) and GDP growth of 6.2% (RBI: 6.5%). The governor, in his recent media interactions, has hinted at some policy space opening up if inflation outlook turns out to be below RBI projections.

Neutral stance to account for uncertainties and retain policy flexibility

All members agreed to shift the stance back to neutral from accommodative. Limited space for further easing seems to be the primary reason for this stance change, as highlighted by Governor Malhotra and Dr Ranjan, though they also see it as retaining the flexibility to react to incoming data. Deputy Governor Gupta and Prof. Singh supported the stance back to neutral, given the global uncertainties, while keeping further actions dependent on data.

MPC members aiming for higher growth

All MPC members expressed the need to support domestic growth with inflation remaining benign amid a weakening global outlook. Most MPC members highlighted the need to revive private investment as growth remained below aspirational levels. Prof. Singh pointed toward an indication of demand deficit, while private investment remained tepid despite government capex. Dr Ranjan stated that deflation in China could have an adverse effect on India’s manufacturing sector. Governor Malhotra stated that post-pandemic growth has been driven largely by public investments, while the need for policies to revive urban consumption and private investment remained essential.

Benign inflation provided scope for frontloading of rate cuts

Members noted that declining commodity prices, benign food inflation and an above-normal monsoon bode well for inflation. Prof. Singh emphasized that real rates remained high even compared to post-pandemic neutral rates (1.65%), with scope for 75 bps of rate cuts without overheating the economy. Most members felt the need to frontload the rate cuts, keeping in mind (1) the lagged effects of monetary policy and (2) that growth continues to undershoot the 7-8% mark amid tapering inflation trends. They believed that the 50-bps cut would send a stronger signal for quicker transmission than staggered cuts.

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