RBI exercise alignment of inflation with the target!

The MPC decided to reduce the policy repo rate by 25 basis points 

The Monetary Policy Committee (MPC) met on 5th, 6th and 7th of this month. The Governor’s Statement after the MPC meeting contains not only the resolution of the MPC with regard to the policy rate and stance but also other announcements and measures, which have a bearing on the monetary and regulatory policies. 

In this backdrop, the MPC, after a detailed assessment of the evolving macroeconomic and financial developments and the economic outlook, decided unanimously to reduce the policy repo rate by 25 basis points from 6.50 per cent to 6.25 per cent. Consequently, the standing deposit facility (SDF) rate shall be 6.00 per cent and the marginal standing facility (MSF) rate and the Bank Rate shall be 6.50 per cent. 

The MPC also decided unanimously to continue with the neutral stance and remain unambiguously focussed on a durable alignment of inflation with the target, while supporting growth. RBI Governor state the rationale for the decision in brief. The MPC noted that inflation has declined. Supported by a favourable outlook on food and continuing transmission of past monetary policy actions, it is expected to further moderate in 2025-26, gradually aligning with the target.  

The MPC also noted that though growth is expected to recover from the low of Q2 of 2024-25, it is much below that of last year. These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focussed on aligning inflation with the target. Accordingly, the MPC decided to reduce the policy repo rate by 25 basis points to 6.25 per cent.  

At the same time, excessive volatility in global financial markets and continued uncertainties about global trade policies coupled with adverse weather events pose risks to the growth and inflation outlook. This calls for the MPC to remain watchful. Accordingly, it decided to continue with a neutral stance. This will provide MPC the flexibility to respond to the evolving macroeconomic environment.  

Arsh Mogre, Economist Institutional Equities- PL Capital - Prabhudas Lilladher said, RBI Breaks the Ice (and Maybe Thaws Growth)! RBI’s decision reflects a pragmatic approach to balancing growth revival and inflation management, while acknowledging the risks posed by global volatility and INR depreciation. The new RBI Governor faced a challenging policy choice early in his tenure, having to decide between supporting domestic growth and maintaining external stability.  

The neutral stance underscores RBI’s commitment to a measured, data-driven easing cycle, ensuring flexibility in responding to evolving macroeconomic conditions. The concept of flexible inflation targeting, was an interesting takeaway from today’s policy, indicating a shift toward a more dynamic balancing of inflation and growth objectives. With GDP growth for FY26 estimated at 6.7% and average inflation at 4.2%, RBI has signaled that future rate cuts will remain conditional on domestic inflation trends and global headwinds.   

The government’s pro-consumption fiscal measures—including tax relief in the FY26 Budget—are expected to stimulate demand, and now RBI has complemented this with lower borrowing costs. This monetary-fiscal alignment strengthens the case for sustained domestic growth, reinforcing our 7% GDP forecast for FY25. Liquidity conditions, which turned into deficit mode in December 2024, remain a key concern, and RBI has acknowledged the need to ensure adequate liquidity support while keeping inflation risks in check.  

While further rate cuts (50-75 bps in CY25) remain a possibility, the pace will be cautious and contingent on incoming data. RBI has made it clear that every policy review will be a recalibration exercise, reflecting on inflation, growth, and financial stability dynamics. The policy move is well-timed and lays the foundation for a gradual easing cycle without triggering macroeconomic imbalances.