Clipped from: https://www.thehindubusinessline.com/opinion/editorial/staying-the-course/article70600527.ece
Status quo in monetary policy was to be expected
Reserve Bank of India (RBI) Governor Sanjay Malhotra speaks on Monetary Policy Committee (MPC) decision, in Mumbai on Friday | Photo Credit: ANI
The Monetary Policy Committee surprised no one by holding its repo rate and retaining a neutral stance. There are enough reasons for it to have done so. Growth has responded well to the 125 bps cut in 2025, while inflation in the upcoming fiscal could be up from recent lows. Growth prospects look good in view of the improvement in investment sentiment in the wake of the India-EU FTA (even as the deal could take some time to come into effect). The same could be said if the US trade deal comes on track. With growth not an overriding concern, there should be room for the MPC to act on inflation, if required.
Meanwhile, numerous fiscal growth drivers are at work, anyway. The slight upward revision in the real GDP growth for the first two quarters of FY27 (6.9 per cent in Q1 and 7 per cent in Q2) reflects the optimism being relayed by high frequency indicators such as credit growth, industrial production and corporate earnings. The income tax and GST rate cuts of 2025 are likely to boost consumption, along with the Eighth Pay Commission award. However, there are imponderables at work, as far as price stability is concerned. While farm sector output and outlook looks robust, global uncertainties cannot be discounted, especially with respect to financial markets and capital flows. Real GDP projections for FY27 will also be dependent on how the change in base year to 2024 in the new GDP series impacts the growth number. In view of this cocktail of factors, the MPC is justified in holding rates for now.
Meanwhile, bond markets were displeased that the Governor did not spell out the quantum of durable liquidity injections for the months ahead, leading to G-sec yields hardening after the policy. G-Sec yields have defied rate cuts over the last year (at 6.5-6.6 per cent), leaving the RBI to deploy deft liquidity management measures. Having announced open market operations, USD/INR buy-sell swaps as well as measures to manage short term rates and liquidity in the December policy, the RBI appears to be implying that it will continue in the same vein. This is implicit in the Governor’s statement that the RBI will be ‘pre-emptive’ in its liquidity management to take care of ‘fluctuations in government balances, changes in currency in circulation and forex intervention.’ The system liquidity, in surplus of ₹1.5 lakh crore over the last two months, has helped in easing short term rates. The central bank would try to keep market rates cool, and better aligned with the repo rate.
Of the slew of developmental polices announced along with the monetary policy, the doubling of the limit for collateral free loans for MSMEs to ₹20 lakh will be beneficial for smaller MSMEs. Allowing banks to lend to REITs, in line with the existing rules for InVITs, will expand the market for banks. Given the increase in digital frauds, the proposal to compensate customers up to ₹25,000 for losses in fraudulent transactions will come as a relief to account holders.
Published on February 6, 2026
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