The Reserve Bank's growth stimulus is a bold bet on price stability
But its subtitle is ironic. While RBI evolved rapidly after 1991 in line with India's embrace of market principles—the rupee was largely floated, ad hoc government funding ended, private banks were okayed, etc—its last leap of evolution was squarely in aid of the rupee. Or, to be specific, the stability of its internal value over time.
Also Read: Has RBI unleashed its arsenal too soon for the economy?
This job is so elementary, it's taken as a given for any central bank. In 2016, however, RBI adopted a flexible but formal framework for inflation targeting. To some critics, what's routine in the West was too ambitious for us. Yet, barring a covid spike in the cost of living, RBI has acquitted itself fairly well. Retail inflation has stayed under 4%, the midpoint of its target band of 2-6%, since February; RBI now projects it at 3.7% for 2025-26, a forecast it reduced on Friday from 4%.
As Governor Sanjay Malhotra's policy statement said, a soft inflation outlook gave RBI the confidence and space to cut its key policy rate of interest by half a percentage point to ease credit in favour of GDP growth. With the repo rate now at 5.5%, its stance is 'neutral' again.
The central bank's brief on its macro calls of duty includes using its policy levers to help the country's economy expand. Hence, its outsized dose of policy easing aims to 'stimulate domestic private consumption and investment"—which the governor called 'imperative" in the face of below-aspiration growth amid 'a challenging global environment and heightened uncertainty."
Also Read: The Reserve Bank's leap of faith: A big rate cut is very hard to justify
Even as we aspire to grow faster, headwinds from the turmoil of US tariffs could overwhelm the buffer of our low trade intensity. As RBI reckons, securing the economy's growth momentum needs a big dose of monetary stimulus. While cheaper loans should attract consumers and businesses to borrow, consume and invest more—and may help reverse a recent credit slump—RBI also plans to free up more money for banks to lend by reducing the cash they must keep with it in reserve. This is in addition to its liquidity injection of ₹9.5 trillion since January.
Oddly, 10-year bond yields rose on Friday. Does a slightly steeper yield curve signal a shift in market perceptions of risk? In going 'all in' with policy tools to secure GDP growth, foreseen at 6.5% in 2025-26, RBI may have also skewed the odds of securing a win that would mark a major moment for its maturity—as a monetary authority that shows the ability and will to keep inflation firmly capped over the long haul. In other words, its real test of victory lies ahead. If price stability endures, applause must follow.
Also Read: RBI's policy review: Why this time is truly different
In RBI's view, most inflation indicators are benign this year, including those of food and fuel prices. Its stimulus, however, is not free of risk. Any error on the side of easy money could over-fuel the economy if it makes demand chase supply in key markets, as usual, but price volatility could be amplified this time by the ripple effects of costlier global trade.
How choppy the high seas will get and how it'll impact the world remain unclear. What's clear is that RBI has acted boldly. Its bet on an internally steady rupee must come good for RBI to achieve durable 'street cred' as a central bank bound by this basic promise to its creditors—cash-holders included.
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