​Prudent action: On RBI interest rate cuts – The Hindu

clipped from: https://www.thehindu.com/opinion/editorial/prudent-action-on-rbi-interest-rate-cuts/article70372583.ece

The RBI needs to be ready for a quick policy pivot as it cuts rates

Published – December 09, 2025 12:20 am IST

The decision made by the Reserve Bank of India’s Monetary Policy Committee (MPC) to cut interest rates once again, by 25 basis points to 5.25%, is both an assessment of India’s current economy and also of what to expect over the next few months. Cumulatively, interest rates have been cut by 125 basis points in calendar year 2025. The last time such large cuts had been implemented was in 2019 when rates had been cut by 135 basis points, in reaction to a plummeting growth rate. India’s quarterly GDP growth rate had fallen from 8.9% in the March 2018 quarter to 3.3% by the quarter-ended December 2019. Growth is currently seeing the opposite trajectory. It has steadily been accelerating from 5.6% in Q2 of last year to the recently released 8.2% in Q2 of this year. From a growth perspective, there are at least two ways to look at the MPC’s interest rate moves. The first is that the central bank is not convinced that growth is currently as robust as the numbers suggest, and so feels monetary policy needs to be as supportive as possible. After all, it could have left rates unchanged at 5.5%. The second is that the MPC feels that Indian companies are still sitting on excess capacity, and so the risks of overheating the economy are slim. So, it might as well push for more growth. The reality is probably a combination of the two: real growth looks higher due to an unusually low deflator, and companies can certainly afford to invest more, even if this is fuelled by debt. A rate cut addresses both issues.

The MPC also possibly feels that the economic impact of the U.S.’s 50% tariffs have not yet fully played out. Supply chains take some time to realign, and so there might still be a further shift away from Indian exporters. Cheaper credit going ahead is something Indian MSMEs, especially exporters, will welcome. On the inflation front, the MPC has lowered its outlook for the year to a benign 2%. However, a jump in food prices or oil prices, for whatever reason, will undo all its calculations. The MPC must be ready to raise rates at the first sign of inflation rising faster than expected. The 2019 rate cut episode saw inflation jumping from 2% in January 2019 to 7.6% in about a year. Taken together, the rate cut suggests that the MPC feels that India’s seemingly robust growth could do with further help, while inflationary worries are a thing of the past. Its decision to retain its neutral stance is a prudent one. Global uncertainty is such that growth and inflation trajectories could reverse direction suddenly, which would need a quick policy pivot.